Morgans’ ‘Best Ideas’ and sectors to watch in August

“The impulsiveness of inflation since 2022 is extraordinary by comparison and it exposes structural complexity in the economy that is making inflation harder to forecast,” Morgans says.

Inflation being less predictable means interest rate expectations also swing more sharply, which flows through into higher volatility in rate-sensitive ASX segments.

“Understanding why exposes the shortfalls in the Australian economy but provides important context for investors.”

An obvious driver is the increasingly frequent disruptions to global supply chains, starting with the pandemic but continuing through the Ukraine and Iran conflicts, while the uncertainty of global trade policy thanks to US tariffs and subsequent retaliation only adds to the unpredictability to supply chains and puts pressure on inflation.

Throw in poor productivity growth, “long-term political failure on both sides” around regulation, housing and energy policy, and government interventions that distort inflation, and it’s no wonder predicting inflation has become tougher.

“Forecasting the trajectory of interest rates is a critical input to investment decision making but it has become more complex and less predictable in the post-pandemic era. Some of these forces are also growing in offshore jurisdictions,” Morgans says.

“Understanding this is important in navigating through large market swings in recent years. It’s also important to remember that these forces can and do change for the better – sometimes more quickly than feared – so it remains critical for investors to be able to look through the headlines to unlock ongoing returns.”

Best Ideas for August

The inflation story is by no means the only part of the economy that Morgans is looking at to inform its investment decisions and “Best Ideas”. Demand for LNG, critical minerals and the inputs to AI-driven electrification, the Budget’s overhaul of capital gains and negative gearing, and a whole host of factors weighing on individual sectors are all pertinent.

Against this backdrop, Morgans has updated its “Best Ideas” for August, which are the firm’s best standalone ideas in Australian equities supported by analyst conviction.

Below, these equities calls are broken down based on sector.

Resources - Overweight

Resources remains Morgans' highest-conviction sector call and is aptly framed as a compelling inflation hedge.

“Inflation remains a defining feature of the global economy and cuts both ways for the sector. Cost bases across the mining complex (labour, energy, consumables and freight) remain materially higher than pre-cycle norms, creating a persistent headwind to margins,” Morgans says.

“However, the same inflationary environment provides a structural floor under commodity prices, with commodities remaining one of the few asset classes with a direct earnings linkage to inflation. This dynamic reinforces the sector's role as a portfolio hedge.”

Copper is a key commodity, with the AI data centre buildout and its associated electrification needs supporting the structural case for the metal and driving continued demand.

Resources Best Ideas

• Capstone Copper (ASX: CSC): Diversified assets, achievable growth, mid-cap copper, pureplay appeal.
• Evolution Mining (ASX: EVN): Quality gold major, material copper by-product, undervalued with returns upside.
• Ramelius Resources (ASX: RMS): High-quality mid-tier gold producer, high margins, growth.
• Whitehaven Coal (ASX: WHC): Under-recognised, large-scale and high quality energy and resources leverage.

Industrials - Overweight

While the sector is vulnerable to bouts of volatility, particularly as conflict in the Middle East remains unpredictable, Morgans argues that “market dislocations continue to present opportunities for long-term investors”.

“Longer term we continue to prefer high-quality businesses led by experienced management with strong track records in cost control and investing for growth. Companies with strong value propositions are well positioned to outperform, and those with robust balance sheets are better placed to pursue growth, including acquisitions.”

Anticipating more volatility over the coming year, Morgans expects investors to be able to find attractive entry points.

“Staying focused on businesses with these characteristics is likely to reward over the long term.”

Industrials Best Ideas

• ALS Limited (ASX: ALQ): Global geochemistry leader, strong industry tailwinds.
• Amcor (ASX: AMC): Defensive earnings profile at attractive valuation.
• Orica (ASX: ORI): Largest explosives company, solid earnings growth expected.
• SGH Limited (ASX: SGH): Diversified Industrial conglomerate with strong capital allocation and returns track record.

Consumer discretionary - Neutral

Another sector feeling the impacts of inflation and rate rises, Morgans says the outlook for consumer goods has softened over the last quarter, with consumer confidence deteriorating to “deeply pessimistic territory”.

“Retailers face cost pressure across both product and operating lines. The AUD has given back recent gains, partially reversing the FX benefit for import-reliant retailers. Logistics costs remain elevated, with higher oil prices adding further risk,” Morgans adds.

“The Fair Work Commission's 4.75% minimum wage increase adds to labour cost inflation, typically the largest controllable cost for store-based retailers. Those with more agile labour scheduling are better positioned to absorb the increase.”

While the firm has maintained a Neutral rating for the sector, flagging downside risk to consensus earnings if household spending contracts further, Morgans is looking for business with “structural demand drivers, proven cost management, and exposure to non-mortgage sensitive cohorts”.

Consumer Discretionary Best Ideas

• ARB Group (ASX: ARB): High-quality niche leader in 4WD. US expansion is key.
• Aristocrat (ASX: ALL): Global gaming leader, organic growth, strong trading momentum
• Eagers Automotive (ASX: APE): High-quality, founder-led and aligned growth company growing into Canada.
• Lovisa (ASX: LOV): Ambitious expansion plans to transform into a global brand.

Banks - Underweight

The banks are facing a number of structural headwinds, including the changes to the CGT discount and negative gearing of established residential property investments, which Morgans says is expected to weigh on investor property demand. Higher inflation and interest rates are also impacting the sector.

“Higher rates support bank net interest margins but also compress customer debt serviceability and borrowing capacity. Higher inflation is also a headwind to the banks’ cost control initiatives,” Morgans adds.

“Even with the recent correction, we believe the low-to-mid single digit earnings growth outlook for the banks does not justify the compressed risk premiums (and relatively defensive narrative) still implied in the bank share prices.”

The firm does not have any Best Ideas for the Banks sector.

Rounding out the picks

Beyond these sectors, Morgans has Best Ideas among Financials, Healthcare, Agriculture, Utilities & Infrastructure, and IT:

• Generation Development Group (ASX: GDG): Oversold in growth selloff. Market leader with strong sector tailwinds.
• Infratil (ASX: IFT): Highly successful global infrastructure investor, delivering 18.4% pa returns since 1994.
• Megaport (ASX: MP1): Strong tailwinds and growing exposure to AI and AI inference demand.
• Nufarm (ASX: NUF): Leveraged to favourable global agricultural trends with a strategy refresh to unlock value.
• Pinnacle Investment Management (ASX: PNI): Scaling managers and affiliates ensure growth profile longevity.
• Pro Medicus (ASX: PME): Market-leading platform, strong fundamentals, attractive valuation entry.
• ResMed (ASX: RMD): Fundamentals sound, improving profitability, margins expanding.
• Sigma Health (ASX: SIG): Defensive, best in class, offshore expansion opportunities.