It will be a hard slog to harvest positive returns in the first half of this year.
That's according to Morgan Stanley head of wealth management research Alexandre Ventelon, who believes Australia will follow the US in raising interest rates in 2022.
"This has historically coincided with poor risk-adjusted returns for equities as a rise in long-term bond rates places pressure on equity valuations, while increasing volatility in capital markets," he posted on Livewire.
"In this context, we expect returns on equities and bonds to be limited in the first half of the year — even possibly negative."
However, there are some pockets of hope if one knows where to look.
Ventelon named 2 particular ASX shares — one with 40% upside — that might do well while others crumble.
Bank with 'materially better margin outlook'
Shares for Australia and New Zealand Banking GrpLtd (ASX: ANZ) have lost 5% of their value since mid-January.
But Ventelon's team recently upgraded the rating of the stock.
"Morgan Stanley recently moved to an overweight recommendation on ANZ, given the bank's diversified business mix, improving loan growth trends, as well as materially better margin outlook."
He also believes ANZ has a "credible cost-reduction strategy" while boasting a now-lower credit risk profile.
"ANZ also had no return-on-equity dilution from the 2019-20 capital raisings and, moving forward, offers a strong capital position with ongoing buybacks and growing dividends."
The Morgan Stanley analysts have slapped a price target of $31, which is about a 14% premium to the share price on Wednesday afternoon.
"The stock currently exhibits solid valuation support with a wide [price to earnings ratio] P/E discount to peers."
ANZ shares closed Wednesday at $27.42.
ASX share with 40% upside
Ventelon's team is bullish on the energy sector this year.
"Despite 2021 being one of the strongest years in the oil market in recent history, further strength lies ahead," he said.
"With the prospect of low inventories and spare capacity by 2H, further demand recovery into 2023, and still limited investments, the oil market will likely be undersupplied in 2022."
Among ASX shares, Ventelon likes the look of Santos Ltd (ASX: STO) to win on this theme.
"Santos is now a significantly larger company post its merger with Oil Search," he said.
"Morgan Stanley believes the market will reward a more modest growth profile which prioritises cash returns to investors along with a focus on de-leveraging."
Santos' recent numbers impressed Ventelon.
"Revenue was 15% higher than expected with the main driver being higher realised LNG prices. Currently, spot LNG prices are soaring at over US$30/mmbtu which is over 3x the 5-year average," he said.
"Santos also provided guidance on year-end production costs which were better than Morgan Stanley's forecasts."
Morgan Stanley, with an overweight rating, has a price target of $10.40. This is a tidy 40% upside from the share price on Wednesday afternoon.
Santos shares have climbed more than 12% for the year so far, closing Wednesday at $7.50.
