ASX shares are under pressure along with global equities as the bond yield curve inverted, but there's one ASX sector that could do very well in this environment, according to a leading broker.
The yield curve inversion refers to shorter-term US government bond yields rising above longer-term yields.
Investors are fretting because history has shown that an inverted yield curve precedes an economic recession.
A downturn would usually sink ASX shares as company earnings will fall in such an environment.
Inverted yield curve is good news for these ASX shares
However, the inverted yield could trigger a bull run for gold, according to Morgan Stanley. If that's the case, this is good news for ASX gold miners like the Newcrest Mining Ltd (ASX: NCM) share price and Evolution Mining Ltd (ASX: EVN) share price.
"The yield inversion between the two- and 10-year has often been regarded as an indicator for an oncoming recession", said Morgan Stanley.
"Prior to 2019, the last persistent inversion occurred in 2006-07, which was followed by a multiyear bull run for gold."
Outlook for the gold price
The gold price is stuck at around US$1,900 an ounce for several weeks and experts are divided on its next move.
The gold price outperforms when the yield curve inverts and the spot gold price is well above consensus.
But Morgan Stanley believes that there are several factors, apart from the yield curve, that could push the precious metal higher.
Earnings upgrade potential for ASX gold shares
"The current yield environment, coupled with geopolitical uncertainties, high rates of inflation and US 10-year real rates and TIPS remaining negative, offers scope for gold upside potential, especially in light of current consensus estimates for the commodity", said the broker.
"Current spot prices are slightly above CY22 MS and consensus estimates.
"However, if gold price forecasts for CY23 were to move higher and spot prices persist, there would be substantial upside risk to earnings for gold equities."
These developments are enough to convince Morgan Stanley to change its negative bias stance on ASX gold shares.
Best ASX gold shares to buy now
The broker noted that the share prices of all gold shares under its coverage are pricing at a commodity price under the current spot price of approximately US$1,920 an ounce.
Its top buy picks in the sector are the Newcrest share price and Northern Star Resources Ltd (ASX: NST) share price.
"NCM remains our top pick for the long term, as several projects move towards FID", said Morgan Stanley.
"NST has the highest FCF generation of our coverage and offers the most sensitivity to upside gold prices, with lowest downside due to well-priced hedges.
"NST also has a near-term catalyst with its brownfield expansion at KCGM."
