Morgan Stanley reveals investment opportunities in Australia: Australian dollar has bottomed out, focusing on the growth sectors in construction.

In the first six months of this year, the market has been severely shaken by the continuous escalation of geopolitical concerns and U.S. policies (both expected measures and unexpected tweets, depending on the situation of the day). Just in the past two weeks: the U.S. canceled "retaliatory tariffs" on countries like Australia - these countries had previously imposed special service taxes on U.S. large tech companies; and the U.S. confirmed a trade agreement framework with China, while suspending negotiations with Canada. The S&P 500 index rebounded strongly at the end of last week to hit a new record high, and the ASX200 index is poised to achieve its best performance since the onset of the COVID-19 pandemic. Such a situation was unimaginable a few months ago- and may not necessarily continue in the coming months. Chris Nicol, Head of Macro Research at Morgan Stanley Australia, pointed out that risks remain high, and in the coming months he will focus on trade policy and labor market resilience. "Our global economic team predicts global growth to slow from around 3.5% last year to 2.5% this year, slightly above the global recession threshold, with greater downside risks." He added that a slowdown in the economies of China and the U.S. could transmit to Australia through trade and investment channels. He shared key indicators to focus on in the next six months and revealed significant opportunities for Australian investors. Nicol will closely monitor three major market risks in the coming months: 1) Trade - the possibility of escalating trade tensions in tariff negotiations, particularly from the perspective of U.S.-Europe relations; 2) Inflation - as tariff costs are transmitted in the U.S. and may affect other countries, inflation may pick up again; 3) Bond yields - concerns about fiscal sustainability may lead to a surge in bond yields. He particularly pointed out that in the context of a global slowdown, the Australian mining and manufacturing sectors are most vulnerable. "The mining sector is more impacted by prices than by quantity, but the softer global environment and trade policy uncertainties will affect a wider range of the manufacturing sector." This impact will be evident in the Australian earnings season starting in August. "Profit expectations for resource companies have been downgraded, and the outlook for industrial sectors due to the turbulent global environment has become cautious." However, Nicol believes it's not all bad news, "we expect earnings to bottom out and rebound, and we are focused on the market vitality stimulated by domestic policies. Any signs of stability in the global situation may prompt funds to shift from large-cap stocks to more diversified sectors." Regarding Australian domestic policy, Nicol believes that the pace of monetary policy easing and the government's tax and productivity reform agenda are worth studying. "At what pace will the Reserve Bank of Australia achieve neutral interest rates? What kind of economic vitality will this stimulate?" Given the market's sensitivity to the policy pace and final outcomes, government spending will be maintained, but "the reform agenda is making financing methods a market focus." Nicol pointed out that the Australian dollar was under pressure during the risk asset sell-off in April, but has likely formed a bottom against the U.S. dollar, with expectations of a mild appreciation to 70 cents by next year. "But more importantly, given the expectations of a stronger euro and yen against the dollar this year, the upside potential of the Australian dollar against the trade-weighted currency basket is currently limited." Although exchange rates and earnings calculations for 2026 may face headwinds, the current exchange rate of the Australian dollar remains competitively valued. Morgan Stanley has built an investment portfolio based on four key points: grasping the resilience of the Australian economy through selected large-cap stocks; seizing opportunities in interest rate-sensitive areas; holding onto structurally growing quality stocks; and retaining resource stocks as a hedge against global risks, with gold allocated as a non-correlated safe-haven asset. Gold has performed well in the volatility at the beginning of the year, and although there has been a recent pullback due to stabilizing market expectations, Nicol believes it retains its value - after all, the market is far from calm (and diversification is the only free lunch in investing). He particularly emphasized that the second half of the year presents the greatest opportunity: "We are optimistic about cash rate-sensitive sectors benefiting from the recovery driven by increased housing construction in Australia." Faced with the never-ending stream of global news headlines, Nicol shares the most important lesson from his career: "focus on the essentials." In this era of information explosion, it is important to learn how to extract the essence from the flood and decisively discard the noise that is irrelevant to current investment decisions. "In this age where a single tweet can disrupt the market, this reminder is particularly apt."