key factors informing our market outlook.
• The S&P/ASX 200 Accumulation Index rose 16.5% over the June quarter.
• Markets rebounded aggressively as COVID-19 curves flattened, unprecedented central bank and government support continued, and social restrictions were eased earlier than expected leading to an improvement in economic activity.
• The strongest performing sectors over the quarter were Technology (+48.7%), Consumer Discretionary (+30.1%) and Energy (+28.2%). Unsurprisingly, defensive sectors relatively underperformed with Healthcare (+2.3%), Utilities (+5.5%) and Consumer Staples (+7.2%) lagging.
• Bonds were range bound and yield remains low. Inflation remains soft and Central banks expressed a desire to keep rates low for an extended period. Low bond yields have supported equity market valuations.
• Credit markets performed well with spreads narrowing. The Australian dollar gained 12.6% to close at 69.03 US cents, which marked the currency’s third-best performance this century.
• Commodities rallied. After plummeting in the March quarter, oil prices surged in the June quarter with WTI rising 91.7%. Gold rallied 12.9%. Iron ore rose above U$100/t on China stimulus and Brazilian supply issues.
Policies implemented by governments to contain the spread of COVID-19 proved effective. This also led to an earlier than expected easing of social restrictions. Activity troughed and started to rebound which prevented economic forecasts from being downgraded further. As the quarter progressed, activity data in Australia and elsewhere started to surprise to the upside, albeit coming off very low levels. Downgrades to corporate earnings lessened.
High frequency data such as retail store openings, vehicle traffic, restaurant bookings and job vacancies suggested that the hard-stop on activity had ended. Consumer confidence rebounded. Government initiatives supported household balance sheets and consumer spending despite rising unemployment and slowing economic growth.
Despite the market rebound, earnings, dividends and buyback activity has reduced markedly over the last few months. The health of corporate balance sheets has also been a major focus for boards. Along with dividend cuts, many companies raised capital to strengthen balance sheets and conserve cash.
OUTLOOK AND STRATEGY
While we fully understand that markets discount forward looking expectations rather than current conditions, we believe that near to medium term expectations are unduly optimistic and as such there is the risk of a near term pull-back.
We are currently experiencing a sharp bounce back from these lows as our domestic and global economies emerge from lockdown due to pent up demand and extensive fiscal and monetary stimulus. However, after this sharp initial bounce, the Australian economic recovery is expected to be more gradual than the decline and will take much longer.
Some of the key factors informing our outlook are as follows:
• Rising COVID-19 infection rates in many parts of the world and the impact on economic recovery
• Domestic recession and the ability for the Government to continue to maintain support levels
• Rising geopolitical risks between China-US and China-Australia
• US Presidential election and domestic upheaval
• Lower corporate earnings, dividends and continued capital raisings
• Interest rates will stay “lower for longer” as central banks around the world have indicated an appetite to do “whatever it takes” to provide liquidity and support markets.
While the above macro/market views will clearly have an impact on our Australian equity portfolio construction, we reiterate that our Quality at a Reasonable Price (QuARP) investment philosophy is largely a research driven, bottom up process that emphasises stock selection over thematic investing. Throughout this period, our focus has remained on companies with strong balance sheets and relatively safe dividends.
In summary, this is a once in a hundred-year event where policy makers have intervened heavily to try and influence outcomes in the period ahead. Presently, those believing in the mantra of “don’t fight the Fed..” are in the ascendancy as credit spreads have moderated, liquidity is abundant, and markets have rallied. While the future may be brighter, we feel that may be more in the longer term with some more inclement market conditions in the near term.