Macquarie analysts say worst of coronavirus contraction has passed

If Australia can avoid a second wave of COVID-19, the worst of the sharemarket contraction may have passed, Macquarie says.

Macquarie sees the market as currently in the ‘late contraction’ phase. Picture: Getty Images

If Australia can avoid a second wave of COVID-19 and shutdowns, the worst of the pandemic-induced sharemarket contraction may have passed, say Macquarie analysts who are taking lessons from the early-90s recession to inform their views on the top stock picks for the coming months.

Taking March 23 as the low point, Macquarie sees the market as currently in the “late contraction” phase, in which stocks rise during a recession even when unemployment lifts above 10 per cent, as it did in 1990-91.

While there is the potential for a retesting of the recent lows, the analysts point out that in the 90s recession this did not occur until nearly two years after the initial contraction. Looking back, Macquarie notes the outperformance of leading resources stocks and expects a similar trend to emerge this time around. The investment bank is overweight in resources, with BHP, Rio Tinto and Fortescue among its preferred holdings.

“In the last recession, the sector leaders BHP and Woodside outperformed. Today we like iron ore majors (BHP, Rio and Fortescue) as they generate strong free cash flow to pay dividends, but we switch part of the resources weight to add gold (Evolution Mining and Saracen Minerals) given money supply expansion and the potential for negative rates,” the Macquarie analysts told clients in a note. “In energy we add around one percentage point to our position in Oil Search given they have already raised, and maintain our small position in Worley.”

Consumer discretionary is another sector Macquarie expects to perform strongly, with the analysts looking back to how cyclical consumer groups outperformed after the market bottomed in 1991.

The investment bank has switched out of Star Entertainment in favour of Crown due in part to Blackstone recently taking a near-10 per cent stake in the ­casino operator, as well as its better balance sheet.

Other stocks Macquarie favours in consumer discretionary include Wesfarmers, in which it has taken a new position, and Aristocrat, due to the digital business likely benefiting from the recent shutdowns, the analysts said.

The investment bank is overweight in communications, noting media was one of the best performers in the early 1990s.

“We switch to News Corp (from Nine Entertainment) for exposure to REA/Move and the stronger balance sheet. We maintain Telstra as a defensive position,” they said.

But the bank is underweight in financials, though maintains a position in CBA due to the strength of its balance sheet. The analysts also told clients they had switched from IAG to Medibank due to the insurer having “the ­unusual problem of being able to return excess profits to policyholders”.

Among the other sectors, Macquarie has reduced its exposure to REITS and is underweight in health and technology. In industrials and materials it has maintained its position in James Hardie and Amcor but removed Reliance and Orora. Despite the emerging trade threat from China, the analysts have also added GrainCorp to the portfolio for exposure to the recovery from the drought and still like A2 Milk as a growth stock.