ASX 200 and AUD/USD outlook, why Morgan Stanley sees upside

We examine Morgan Stanley’s base-cases for Australian equity markets and the Aussie dollar over the short-term.

ASX 200: a strong recovery so far

Global equities have ripped higher in the last few months, as many investors grow more confident in the economic outlook.

Indeed, from the low it recorded in March, the ASX 200 benchmark has risen significantly, last trading at the 5,744 point level. The Australian dollar has also surged from its March lows and currently trades around the 70 cents-mark.

Centrally, banks and miners – which contribute significantly to the ASX 200 benchmark – have risen particularly strongly in the short-term, with FMG trading around all-time highs. In saying that, CSL – Australia’s largest-listed company has struggled in recent times, with its stock down ~8% in the last month.

Such occurrences come as value has managed to outperform growth in the short-term, a move which Morgan Stanley (MS) analysts think may persist.

‘Value has had a brief cameo of outperformance, and combined with the extreme gap relative to growth is sending warning signals regarding the potential for a more sustained rotation event.’

Granular distinctions aside, Morgan Stanley’s base-case view is for the ASX 200 to continue to rise over the next twelve months, with the investment bank’s analysts forecasting the index will hit 6,200 points by June CY21.

This base-case view ‘continues to assume that earnings will be at 2019 levels by FY22 and also assumes that in a world of low rates, ultimate recovery in economic activity, and continued policy support.’

By comparison, Morgan Stanley’s bull-case sees the Australian benchmark hitting the 6,900 point level in the next twelve months; while the bear case posits that the ASX index will fall to 4,800 points – implying double-digit downside from current levels.

Either way, MS sees three key sources of risk to a sustained recovery in Australian equity markets, including: escalated Australia-China trade tensions; the emergence of a second wave Covid-19 outbreak; and policy missteps in regards to the effective use of stimulus.

The above outlined bear case, says MS, would be triggered by the emergence of one or more of those risks factors, and though this occurrence would likely cause the market to retrace sharply, it's unlikely that the ASX would retest the prior, March lows – according to the investment bank.

AUD/USD: a bullish forecast for the Australian dollar

Moving beyond equities and looking at the outlook for the Australia dollar – AUD/USD – Morgan Stanley notes that in recent times it has been one of the best performing G10 currencies against the USD.

Even so, the investment bank thinks the Aussie dollar has some room to run higher: currently forecasting that the AUD/USD will hit 0.73 in Q420 and remain stable across 2021, hitting 0.74 in Q421.

Summarising the catalyst behind this expected rise, MS analysts said they expect the Australian dollar to see ‘front-loaded gains from a less dovish RBA and tight relationship with risk and global growth.’

How to trade indices and currencies

What do you make of the current situation: do you see bullish or bearish opportunities? Whatever your opinion, you can trade indices, currencies and equities – both LONG or SHORT – with IG’s easy to use trading platform now.

For example, to buy (long) or sell (short) the ASX 200 index using CFDs, follow these easy steps:

  1. Create an IG Trading Account or log in to your existing account
  2. Enter ‘ASX 200’ in the search bar and select it
  3. Choose your position size
  4. Click on ‘buy’ or ‘sell’ in the deal ticket
  5. Confirm the trade

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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