In this week’s investment article I take a closer look at Shane Oliver’s nine keys to successful investing.

Whilst I’m sure many of you have read or heard of some of these gems before, I think this is a timely reminder in times when debt is increasing and the gap between those that have and those that don’t widens.

These principles of investment carry through to all generations and apply equally to young adults entering the workforce, young families paying off a mortgage or those in retirement.

In many years of experience as an adviser, I have witnessed many very successful investors who have amassed large amounts of savings simply by starting off with as little as $100pm in a savings plan and building from there.

As they say, the most important step is just getting started. Once a disciplined savings pattern is established then regardless of the amounts, the power of compounding interest kicks in and over time a small initial sum can grow to a large nest egg. Superannuation is a great example of this strategy that largely relies on a combination of compound interest, regular ongoing contributions and time to achieve a good end result.

Young people are often put off by superannuation due to the inflexible long term nature of this savings vehicle. However, the inflexibility is generally the thing that determines that they will have sufficient set aside for a comfortable retirement. The recent early access to superannuation, whilst necessary for some is bound to have a significant impact on final super balances. Superannuation is simply one form of savings vehicle and whilst very tax effective I think a potentially smarter strategy combines super with other investment options that may be more flexible and cater better in periods of uncertainty like those we are currently facing. Very few people can say that they have a job for life regardless of external factors and therefore good planning and a diversified investment approach can take some of the short term risk away by allowing access to funds in tough times. I don’t believe that there is any one investment strategy that can guarantee success, rather a combination of strategies that utilises one or more of the nine keys highlighted in this article are less likely to fail. Some investors will only invest in shares, others in property and others prefer to stick to cash. Regardless of the choice of investment vehicle the principles ultimately remain the same. Step 5 which talks about “turning down the noise” is possible one of the biggest traps that new investors make. In the graphic illustration showing share market performance over days, months, years and decades we can see the impact that time can have. Here the share market risk or volatility is significantly higher over shorter time frames and yet often people will make short term decisions to buy or sell volatile assets like shares based on a positive or negative press release.

Finally point 9 talks about seeking advice. Those of us with perhaps a few more years of experience under the belt will know that you can’t be an expert in everything. Many people go to a gym and engage the services of a personal trainer, not because they don’t know how to use the equipment but rather to keep them accountable, on track to achieve their goals and importantly to avoid mistakes which could end up causing an injury. These days there is no end to the amount of information that can be gleaned off the internet, but if I’m sick I want to see a doctor or if I have a tax query I want to talk to an accountant. In the same way a good adviser should be able to help you achieve your goals as you pass through the many stages of life and importantly also help you to avoid some of traps and pitfalls that many investors fall into.

Disclaimer:

This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to their objectives, financial situation and needs.

This week a few things have caught my eye that are having and impact, or will have an impact on investment markets and portfolios in the coming months.  This article is a quick and easily digestible summary of these items: Home prices to jump, bonds and the latest meeting of the US Federal Reserve.


Bonds

Franklin Templeton bond strategists said in a note:

“Bonds in this coming era more resemble certificates of confiscation than certificates of income from governments eager to reflate economies and deflate their debt piles.  The bond frogs get boiled nice and slowly as savers capital is sacrificed further in favour of over leveraged debtors”.

There are many white papers doing the rounds which speak about the role of bonds in a portfolio and how the ultra-low yields, and extended maturities means their contribution to balanced portfolios is going to be very different (i.e. lower) in the next ten years compared to the last ten.


Federal Reserve meeting

The last meeting of the Federal Reserve in the USA prior to the November election was held this week. The meeting pretty much confirmed what we already knew, that they will keep interest rates near zero through to 2023.

The market, looking for a little more than that, sold down towards the end of his speech on Thursday. Not much in the way of new stimulus being announced saw profit takers move in.

What is important though, is that the current low rates, and willingness to allow inflation to run hot for a while, is confirmed. It is open slather for the carry trades, and likely to mean that any dips are met with buying.

While some of the highest flying growth names may sell down, there are other sectors that will benefit longer term from the low cost of capital.


Home prices to jump


Property indexes are now reflecting falls in home prices in Sydney and Melbourne, but in Brisbane and the Gold and Sunshine Coasts, prices appear to be remaining very solid. In fact, the ‘on-the-ground’ commentary from real estate agents and locals is that everything coming onto the market is selling very quickly.

Also Read: Australian Property Market Outlook – 10 September 2020

While our natural inclination is to be wary about what happens when the bank ‘forbearance’ turns into ‘foreclosure’ we do need to think about the alternative possibilities. Back in April, Westpac had predicted an 8% slide in Brisbane home prices, and have now pared that back to a 2% forecast dip by mid 2021.

In an update reported in Thursday’s AFR, they now believe that dip will be followed by a 20% rise in home prices from 2021 to 2023. Is that just wishful thinking? It was after all a bank economist forecast!

The reality is that we are looking at a minimum of three years of near zero official interest rates, and a fiscal policy regime which is more supportive than ever in history. Money has to go somewhere, and one can make an argument that a 3% net yield on a residential property actually looks OK.

Michael Matusik also sent his ten year history update with median home prices for the ten years from 2010 to 2020.

The price of the median detached dwelling over that time for Brisbane, Gold Coast and Sunshine Coast increased by 32%, 30% and 33% respectively.

Table 1
Table 2

Stamp duty and sales commission will take a chunk of your returns as an investor, and tenant hassles may drive you mad, but this context may be useful in thinking about your property strategy. Michael Matusik provides some excellent demographic guides for anyone looking to make serious property decisions.

Get in touch if you want to see some of his work.

Equities rose again in August, in spite of the ongoing global COVID-19 economic slump and confirmation of Australia being officially in recession.

While the Australian dollar continued its rise, up 3.2% to $0.7375 by the end of the month, that didn’t offset the very strong gains in US stocks. The S&P500 index in the USA gained 7.19%, and the tech heavy NASDAQ gained 9.7% in August (but has subsequently dropped just over 5% in the last week).

European markets were more muted during the month with the German DAX the best, up 5.13%. Looking at our table below, you can see the divergence between global and Australian stocks over the last year, which reinforces the benefits of portfolio diversification.

Screen Shot 2020 09 10 At 2.51.40 Pm

The property assets reflected in the table are listed property securities traded on major stock exchanges, not residential property, which has very little representation in these indexes. For more a detailed update on the residential property market, have a read of Peter Kirk’s Australian Property Market Outlook (September 2020) article.

A major component of the indexes are office and retail properties, both of which are vying for the ‘most hated’ asset class label at present.

Work from Home and Shop from Home are the current trends, and few investors are willing to bet on a return to the ‘old normal’. There is no doubt that trends are changing, thanks to COVID-19 but it is in these times – during extreme negative sentiment – that bargains are found.

Fixed income markets saw losses in August, as yields rose in the longer maturity bonds. The ten year Australian Government bond started the month at 0.83% yield to maturity and ended the month at 0.98% yield.   A rise of fifteen basis points (0.15%) results in a 1.20% loss in the value of a bond.  Although yields rose, causing a drag on prices, credit spreads continued to come down, offsetting some of the loss from rising yields. Still, the index for both Australian bonds, and global bonds were both lower in August.

If you have any questions about our August 2020 Financial Market Review, please get in touch.

Over recent weeks we have seen much discussion on the state of global and Australian share markets, and it’s not surprising to see the strong sell-off of technology stocks in recent days.  This week we thought that it would be timely to provide some commentary on the Australian property market.

Rod Cornish, Head of Real Estate Strategy at Macquarie Asset Management addressed this topic in a recent video.  For those of you interested, the video below provides an informative look at both the residential and commercial segments of the Australian property market and the impact that  COVID-19 has had.

For those that prefer an abridged summary of this, I have provided some short commentary below.


Key Australian property market drivers

There are three major drivers for the Australian property market:

  • Low interest rates;
  • Low unemployment; and
  • Strong net migration

In the lead up to this pandemic these three things were certainly helping to drive property market growth.  This was particularly so in the Sydney and Melbourne property markets where residential house prices had recovered sharply over the previous year.  Other major cities around Australia had not experienced the same growth, but nevertheless had not witnessed the sharp falls that some were predicting.


Pandemic impact on property prices

With the onset of the lock-downs and decrease in migration that occurred earlier this year we witnessed a sharp fall in both property listings along with a decline in house prices.  Investment properties took the brunt of these falls, especially inner-city apartment rentals that relied heavily on overseas students.

With an unemployment rate rising rapidly and expected to continue to rise well into 2021 it was not surprising that many commentators were predicting further sharp falls in residential house prices.  However, listings in some of the major cities, except for Victoria, are back to almost pre-COVID levels and some of the falls have not been as great as expected.

Similar to what we have seen in share markets, Government stimulus and initiatives like JobKeeper and the HomeBuilder scheme have played a major role. Other important factors are historically low mortgage rates and bank support by way of short-term mortgage relief which have all combined to keep prices relatively stable for now.


Where is the Australian property market heading?

Macquarie believes that the current decline in home prices of between 2-4% could increase up to around 10% off the back of higher unemployment and the withdrawal of Government support, however if this were to occur then they believe further Government initiatives to stimulate growth would be very likely.

Macquarie also believes that with interest rates predicted to stay low for at least the next 2-3 years, house prices are likely to bounce as employment and confidence returns. Although, medium to longer term growth rates are predicted to be much more subdued than in past decades.

On the commercial side, the increase in online shopping has seen a further demand for logistics and industrial properties and COVID-19 has further increased this demand.  In contrast, the retail sector has suffered badly and the growing trend for employees to work from home could easily see the demand for office space also reduce.

It continues to be a confusing story when it comes to economic news and share market performance.  In a week that produced Australia’s first recession in 29 years and the worst growth result since the end of WW2 one could have been forgiven for thinking that this was bad news for the share market.

However, to the contrary the Australian market continues with its strong path of recovery and is only around 6% below where it was 12 months ago.  Meanwhile the broader US market recorded another very strong rise yesterday and the technology heavy NASDAQ recorded yet another record rise.


Lock-downs hampering recovery

There is no hiding the fact that border closures and the Victorian lock down is having a significant impact on the Australian economy and the Federal Government is very keen to see some of these restrictions lifted as soon as possible so that business, domestic tourism and employment prospects can begin a very slow path to recovery.

It must be said however, that the economic situation in Australia is not nearly as bad as many other countries such as the UK with a negative growth June quarter of -21%, Europe -15% and the US –9%.  We understand this difference is cold comfort to individuals and businesses currently struggling, however it will hopefully ensure Australia is better placed to recover.


What is driving share market growth?

What is driving the share market recovery in the face of such a poor economic backdrop and an official recession?

The most obvious reason for the relative strength in the share market is simply the flood of liquidity from central banks on a global scale coupled with a very low interest and inflation rate environment.

Another school of thought is with interest rates at near record lows, combined with investors being nervous about short to medium term property prices, many investors have poured into the stock market looking for bargains where companies may have been oversold earlier in the year.


Impact of ‘Robinhood’ investors

In addition to the bargain hunters, there are those looking to take advantage of recent volatility to speculate on growth, particularly through companies with a technology focus. This group has been coined the ‘Robinhood’ cohort, based on the name of a smart phone app that has attracted a large number of millennial investors in the US.

As reported in the Financial Review a few weeks ago, the average weekly value traded through Commsec, has grown almost four-fold, from $1.7 billion before the pandemic to $4.2 billion during the COVID-19 period.

Recession Covid 19 Robinhood Investors 1024x666 1

Superannuation changes coming

In other news this week, the Federal Parliament is currently debating two changes impacting superannuation and self-managed super funds (SMSFs).

6 member SMSFs

The first of which is a proposed increase to the number of members allowed in an SMSF from four to six members.  This change was announced back in the 2018/19 Budget however never came to fruition.

The overwhelming majority (93%) of SMSFs only have one or two members, typically a couple. The expansion to six members will likely only be taken up by a very small percentage of families, however in the right situation it could transform an SMSF into a powerful multi-generation wealth creation and protection vehicle.  If this change becomes law, we will provide a more in depth update on how it can be taken advantage of.

Bring-forward rule extension to age 67

The second and potentially more powerful change currently before the Senate after passing through the House of Representatives last week seeks to extend the age limit for bring-forward non-concessional contributions from age 65 to 67.

Laws recently changed from 1 July 2020 which increased the superannuation work test from age 65 to 67. However, someone who was aged 65 or 66 can still only make a non-concessional contribution of $100,000 without needing to meet the work test. This change will enable someone over 65 (but under age 67) to use the bring-forward rule and contribute $300,000 in one year.

Interestingly, the age at which an individual has full access to their superannuation (regardless of whether they’re still working or not) remains at age 65.  This provides a two year ‘magic-window’ where lump sums can be taken and subsequently re-contributed thereby changing ‘taxable’ component monies to ‘tax free’ component amounts which are tax free if passed onto adult children beneficiaries or an estate in the future.

There is no guarantee this change will pass in the current Parliament sitting days, so it could October before it becomes law. When this change happens it will apply from 1 July 2020.


Questions or feedback

There is no doubt we are navigating through uncertain times.  If you have any questions in regards to this article, or if you need any clarification, please reach out to me or your Quill Relationship Manager for further information.

All major asset classes finished positive in the month of July. Equities posted modest returns, and when measured on a monthly basis mostly in line with longer term expectations.

A strong bounce back in equities during April, May and June held through July in spite of the release of statistics that indicate the worst slump in economic output since the Great Depression. The rise in the Australian dollar masked a larger return from global shares which actually gained 3.5% in local currency terms. Base metals like copper (+7.3%), bulk commodities like iron ore (+4.95%) and precious metals like gold (+10.9%) all helped to draw money into the Australian Dollar. Not that it is all about commodities. The USD itself fell 4% measured on a trade weighted basis vs other currencies, finally reflecting perhaps that the US federal deficit, on track for $3.7 trillion in 2020, is 17.6% of GDP.

Screen Shot 2020 08 13 At 11.53.35 Am

Fixed income markets continued a positive trend. Yields in the longer duration bonds fell, and credit spreads (the difference in yield between the highest rated bonds and lower grades) continued to contract, providing a positive boost for bond markets. No joy however for term deposits. Those investors continue to be the silent victims of the global central bank obsession with stoking inflation, and supporting financial markets.

Currently, the highest one year rate we are seeing is 1.30% with Judo Bank, and everyone else is below 1.00%. Going out to the five year deposit horizon is even worse, with Judo Bank offering 1.55% and everyone else at 1.00% or below. The world is awash with money, and apparently they don’t need any more of yours, thanks to Central Banks ballooning their own balance sheets!

The current yield to maturity of a broad index of investment grade Australian corporate bonds with a five year maturity is around 1.94% currently. Against this backdrop the Australian five year government bond currently yields 0.40%. The difference between these two is the ‘credit spread’. It indicates that presently, market participants require an additional 1.54% per annum, to be lending to the average investment grade company in Australia. We call this a 154 basis points credit spread.

Our table below illustrates how official interest rates in Australia have moved over the last 26 years.

Screen Shot 2020 08 13 At 11.55.18 Am 1024x637 1

Borrowers for the last 9 years have known nothing but falling interest rates. However that takes a toll on frugal savers who in earlier decades provided ‘scarce capital’ to fund borrowers. Global central bank largesse has deprived those investors of their natural market.

With interest rates at what the industry refers to as the ‘zero bound’ it forces all investors up the risk curve in order to just keep up with inflation. This is where setting realistic expectations, and having a cashflow plan so that you can remain invested in appropriate assets, for the appropriate time horizon, becomes vitally important.

If you want to get more involved with your superannuation, investments or insurance, please give us a call at Quill Group.

This week’s economic note note is again dominated by the increased cost of lock-downs.  The cost of Victoria’s increased lock-down is estimated to be a hit of $12bn to the National economy. The Federal budget deficit is now projected at $235bn up from the most recent projection of $184bn. These are very large numbers and I doubt anyone would be surprised if this number increased over the next quarter.


Increased Debt Levels

However, as previously stated this should be viewed in the context of a percentage of GDP. The graph below shows the latest forecast at somewhere between 40% and 50% of GDP and history over the last 100 years shows that this percentage has been a lot higher, albeit during times of war.

Australian Government Debt Percent Of Gdp

Source: RBA, Australian Treasury, AMP Capital

The other thing to remember is that many of our trading partners would love to be in a similar position as many have debt levels that are significantly higher. Of course this still poses enormous pressure and challenges on future Governments to come up with policies that drive employment and create higher levels of growth. Additional stimulus is therefore very likely to come in the form of investment incentives, tax cuts or a combination of both.


Interest Rates on Hold

In other news, the RBA left monetary policy (interest rates)  on hold this week at 0.25% but did leave the door open to further cuts should things deteriorate more. Most economists are now predicting any rate hikes to be at least 3 years away.


Share Market Rebound

One of the questions that many people are asking is why have share markets rebounded so quickly despite the pandemic in many countries actually getting worse.

There has been some positive news regarding various COVID-19 treatments and potentially even an eventual vaccine, but a vaccine realistically is some way off.  However, things could certainly continue to get worse with the pandemic before they get better and coupled with that we have a US Presidential Election due in November which further adds to the short term risk.

Why then are we continuing to see periods of strong share market performance?

One could argue that at present there are not many alternatives for investors seeking above inflation level returns but the most likely scenario is the huge amount of stimulus pumped into the global economy over recent months coupled with very low interest rates making some shares look reasonable value at these current levels.

A good example of this is listed infrastructure assets, many of which have been impacted in the short term by the various lock-downs but are now trading significantly below what some managers believe is fair value.

All seasoned investors understand that predicting next weeks or next months movements is near enough to impossible, so instead we have to focus on what will likely happen over the next three years. This is how our investment managers position themselves, and we encourage our investors to also look at portfolios with the same mindset.

If you have any questions regarding any of the information contained in this article, please get in touch with your Quill Relationship Manager.

Paul Xiradis is the Chief Investment Officer at Ausbil Investment Management Limited

In this commentary Paul talks about some of the themes arising from COVID-19 that we have previously touched on in recent notes and he expands on what the impact that these changes may have on the economy in the later half of 2020  and beyond.


Investment Outlook

Q: At the middle of 2020, where do we stand with COVID-19 from a macro viewpoint, and has your outlook changed?

It has been quite an incredible ride over the past few months. Back in March, we were looking into the unknown with a pandemic that was both unpredictable and dangerous. Incredibly, almost in unison, governments and central banks across the world’s markets scrambled together the biggest stimulus package in history, over 10% of world GDP in value. Until then, things seemed bleak, but after this wave of stimulus, focus turned to containment and recovery.

We felt that in the second half of this year there would be a recovery, we said this early. A few months on, we are experiencing a far better outcome than most expected. This is largely due to the decisive global stimulus that supported the world economy in hibernation, and the fact that this period of hibernation has been a lot shorter than expected. Australia and New Zealand, in particular, have tackled the virus a lot better than the rest of the world.

What began as panic, with people hoarding toilet paper, and people and companies alike hoarding cash, has seen cash balances across the board grow dramatically. When there has been any softening of the disastrous view, we have seen some of this cash put into action. It is only a matter of time before this pent-up demand is allowed to express itself in spending and investment as the Covid risks begin to subside.

Retail spending has been a lot stronger than anticipated. Activity in construction and trade activity was a lot stronger than expected. We are seeing e-commerce driving activity levels, allowing people to continue to operate, and as a result we saw sales move up, not down. Unemployment did not peak anywhere near, at this stage at least, what the market was anticipating. The JobKeeper stimulus package was under-subscribed by some $60 billion. Most commentators are readjusting their forecasts back to levels nowhere near as dire as first anticipated. I think this provides greater confirmation that we will see a recovery in the second half of this year, that the recession will be shallower to what most were anticipating, and will be shallower to what we were anticipating.

While COVID-19 re-infection risk remains high, developed markets are succeeding with lock-downs. In Australia, we have got COVID-19 relatively under control, and that has allowed the authorities to respond by opening the economy faster, further supporting our view that the economy will begin to recover in the second half of 2020.

In Victoria, locally acquired cases are sharply rising in Melbourne, and will see Stage 3 restrictions reinstated for 6 weeks until 19th August for Metropolitan Melbourne and the Shire of Mitchell, and the closing of the Victorian and NSW state border. The swift containment measures implemented by authorities is reassuring. At this stage, this will probably be a temporary drag on economic activity through the September quarter. Meanwhile, we expect the remaining Australian states to continue with their scheduled reopening dates, enabling activity to resume, which should help to cushion, to some degree, the impact on GDP growth. We continue to monitor this specific development closely as new information comes out but, at this stage, it does not change our current medium-term outlook on the expected ‘U-shaped’ economic recovery profile for Australia.


How COVID will change some sectors long term

Q: Do you think COVID-19 has changed many sectors for good?

What COVID-19 has done is fast-forward some of the super trends which were already emerging, some of which will now become a permanent way of life. The use of technology to run our lives on a day-to-day basis was forced on us by necessity, and now it could become the norm. Where there was reluctance by individuals to use electronic banking, through necessity everyone has moved to self-service banking. The same with goods and services, people had no choice but to use e-commerce as a way of conducting their lives and obtaining life’s staples. We also saw that in a lot of discretionary retailing as well. These trends were developing anyway, but the inescapable global experiment triggered by COVID-19 has proved that society can operate in lock-down, and a lot of this is down to technology. As a consequence of being shown another way, there is likely to be a high degree of permanency in these behavioural changes.

Another thing we learnt is that there are businesses that can thrive in such environments. A lot of retailers have realised that they can operate using e-channels for sales, and that they don’t need to have such a large bricks-and-mortar footprint. This has accelerated the trend giving retailers an upper-hand in negotiating with landlords, this was not the case ten years ago. The shift from bricks-and-mortar retail is not a fad, it is structural.


Australian technology sector

Q: Australia seems to have a burgeoning tech sector. How has this gone in the face of COVID-19?

Technology companies have outperformed during COVID-19 on the explosion in work-from-home demand, related entertainment, demand for home-based tech, and more fundamentally, in proving-up online sales and distribution for both essential and discretionary spending. People have increasingly learned to trust tech and online.

Under Covid, we have seen an acceleration in purchasing through online platforms. One beneficiary across these platforms has been Afterpay (ASX: APT), the buy-now-pay-later platform. Afterpay has grown dramatically, as reflected in its share price which has recovered almost eight times from its low point in March. People are now conducting their lives through online platforms and paying with it through services like Afterpay.

We have seen this in other technology stocks as well. Demand for data centres has grown dramatically. NextDC (ASX: NXT) is one of the groups that actually experienced upgrades in earnings during Covid, with the level of inquiry and demand growing significantly since the outbreak. Again, we believe the pull-forward of demand is not only structural, it is accelerating.

We are seeing that global leadership in tech now, and Covid has played its part in accelerating some of the super trends these firms are riding. In addition to Afterpay and NextDC, you have Appen (ASX: APX) who specialise in providing test data for machine learning and artificial intelligence, Altium (ASX: ALU) that develops design software, and Audinate (AD8) that leads the audio data transformation market. Atlassian (NASDAQ: TEAM) is another example of Australian tech leadership, though it is listed in the US.

These tech companies are familiar to us because we have nurtured many of these, researched them extensively, and invested in them when they were micro-cap and small-cap stocks. When they become bigger companies, we are fully aware of their performance and potential, and these companies now feature in our mid and large cap portfolios.

You can liken these tech leaders to the health care sector a few years ago. We have produced some incredibly strong global health care companies out of Australia, from Ramsay Health Care (ASX: RHC) to Sonic Healthcare (ASX: SHL), ResMed (ASX: RMD), CSL (ASX: CSL) and Cochlear (ASX: COH), these are all Australian-born companies and they are world beaters. The tech sector now seems to be following the same path.


Resources sector and COVID

Q: How are resources going with COVID-19, especially with the recent geopolitical tensions?

One of the things we have said from the beginning is that, globally, there has been an incredible response by governments in terms of fiscal stimulus. By contrast, if you go back to the GFC it was more about austerity than spending, and it was up to the monetary authorities to do the heavy lifting. This time around, we have seen both monetary and fiscal stimulus applied in concert with plans to bring forward activity and infrastructure projects. This is happening globally as a means of reigniting growth, in China, recently in Australia, and we are likely to see it in other parts of the world.

On the basis of fiscal stimulus and accelerated infrastructure spending, the outlook for resources, and particularly steelmaking resources, is pretty strong. Iron ore, the most important of these for Australia’s terms of trade, is seeing renewed demand as Covid-driven supply constraints shift demand to Australian ore. Companies like diversified miners, BHP (ASX: BHP) and Rio Tinto (ASX: RIO), and specialist iron ore miner, Fortescue Metals (ASX: FMG), are beneficiaries of this strong demand, as are the mining services companies contracted to help deliver this supply to world markets.

Electric vehicles (EVs) is another theme that is looking stronger. During the shutdown, traditional car manufacturers were retooling towards the production of electric vehicles, creating further demand for selective metals. The changing trend towards EVs will see increased demand for copper from companies like OZ Minerals (ASX: OZL), as well as nickel and lithium in the next 12-months.


Banking sector and COVID

Q: How are the banks faring, and how do you see them as we move through COVID-19?

If you are optimistic about Australian and New Zealand economic recovery, and we are, you have to be comfortable with the banks. The banks are most leveraged to an improving environment. We are seeing that already. Again, the dire expectations of three months ago, even two months ago, have improved markedly. Banks were provisioning for an economy with far higher unemployment levels than we have experienced, a deeper negative growth experience than has occurred, and a more elongated recovery than we are seeing at this juncture.

We believe that the depths of the downturn are not going to be anywhere near as bad as initially expected, and the recovery is not going to take as long as was expected. If this remains the case, it is a fantastic opportunity for investors to reweight back into the banks. We increased our exposure through the Covid sell-down, and we are now the most overweight we have been in banks for a number of years. This is on the basis that we think earnings will exceed expectations, bad and doubtful debts may not be nearly as bad as the market has been pricing, and if that is the case, they have strong balance sheets, and banks will return to paying an ongoing sustainable dividend, albeit at a lower payout ratio.

Most commentators were incredibly negative on banks, and most institutions were underweight the banks based on some pretty ordinary and dire forecasts in the market. All of a sudden, the banks have become a pretty attractive proposition, and the market is still underweight, so the setup is for the banks to trade up as we move into the second half of 2020.


More information

To read more market updates from Quill Group, you can do so on our blog here: Quill Group Blog – Financial Market Updates

If you have any questions regarding this update, please speak to your Relationship Manager.

 

 

The following is from Chris Lioutas from Insight Investment Consultants who sits on the Quill Group Investment Committee.  Although relatively technical in nature, we thought it was worthwhile sharing his commentary on where markets are at currently and what headwinds they are facing.

Markets

  • Local and global equity markets fell this week on continued concerns regarding rising virus cases and potential further lockdown measures.
  • US S&P 500 companies slashed or suspended over $40bn in dividends in the 2nd quarter, the deepest quarterly drop since 2009. In contrast, the US tech-heavy NASDAQ index rose to all-time highs whilst the S&P 500 is up more than 40% from its March lows.
  • Chinese equity markets rose very strongly this week on a wave of retail investor buying following a government directive encouraging the need to foster a healthy bull market in domestic stocks.
  • In local stock news, the banks announced they would be extending their deferral of mortgage repayments by another 4 months. Hardly surprising given pressure from the government, given no banks wants to take residential property onto their balance sheet, and given banks make money as long as there is a customer with a loan accruing interest.

Economics

  • The RBA kept rates on hold at their historic low of 0.25%, pledging their continued support and maintaining that fiscal and monetary support will be required for some time.
  • More than 1 million Australians have lost their jobs since the start of the virus and 10% of the labour force are working less hours than they wish. That means that 3.45 million workers are unemployed and underemployed, which represents almost a quarter of the total workforce. PM Morrison will have no choice but to extend virus stimulus measures.
  • Australian private sector credit growth fell for the first time since 2011 with a contraction in May. Business loans, personal loans, and investor housing loans all fell, whilst owner-occupier loans continued to grow steadily.
  • The value of Australian lending for housing excluding refinancing fell 11.6% in May, whilst refinancing was activity was strong as borrowers locked in low fixed rates. The value of lending was down sharply for both owner-occupiers and investors.
  • Sydney’s rental market has recorded its steepest quarterly decline in 15 years, with median rents falling 3.8%, with tenants seeing the lowest rental prices in 5 years. About 30% of all properties listed for rent have reduced rents in the past 30 days. More than 22,000 rental properties lay empty across the city, with declines in immigration and foreign students hurting the most.
  • Data showed a record rebound in Eurozone retail sales in May, whilst unexpected growth in the US services sector last month, which surged to pre-Covid levels, further bolstered sentiment.
  • The European Commission is forecasting a contraction of 8.7% in economic growth before a rise of 6.1% in 2021, worse than its previous forecast.
  • A private survey showed that China’s services sector expanded at the fastest pace in over a decade in June as the easing of lockdown measures saw consumer demand recover. However, companies continue to shed jobs.

Politics:

  • With virus cases rising in the US, particularly in Texas, Florida, and California, over 40% of the US has now reversed or delayed reopening measures. Whilst cases are rising, there has only been a very slight uptick in death rates. Time will tell whether increase in cases translates into a spike in deaths. At this stage, that looks unlikely given hospitals are better prepared, treatments are now available, and the predominance of new cases has come from those aged 20-39 with more testing.
  • Australia has formally suspended its extradition agreement with Hong Kong and the Chinese authorities. Prime Minister Scott Morrison said that new national security laws brought in by China represented a fundamental change. He also addressed that Australia would be willing to accept Hong Kong citizens looking to relocate to another country. Temporary visa holders in Australia will be granted an additional 5 years on their visas.
  • The NSW-Victoria border closed following a spike in cases in Victoria which has seen the state go back into lockdown for 6 weeks, possibly longer. The border closure is being handled by NSW. The NSW Premier took the opportunity to tell other states to open their borders in the national interest, with NSW given the action NSW is now taking to protect itself and the rest of the states.
  • Prime Minister Scott Morrison has flagged another round of stimulus measures ahead of September’s fiscal cliff, with the government looking at extending a modified form of JobKeeper as well as bringing forward tax cuts and the possible extension of insolvency protections. Those sectors hardest hit by lockdown (tourism, airlines, hospitality) will also see significantly more support.
  • British PM Boris Johnson has told the German government that the UK was prepared to accept a no deal scenario on trade with the EU at the end of the current post-Brexit transition period at the end of this year.

If you have any questions regarding this commentary and how it impacts your investment portfolio, please get in touch with your Quill Relationship Manager.

Happy New Financial Year from all here at Quill. Hopefully this next financial year shapes up to be a more positive and prosperous financial year than the last.


Quill Group Preface

We are all acutely aware that many businesses have had a very difficult year and in some cases will not recover. As a consequence there are lots of individuals that are either out of work or working reduced hours. This of course impacts on both their family as well as the broader community.

On a slightly more positive note we heard today that most States with the exception of Victoria will be opening up their borders in July and hopefully this will encourage more business, travel and tourism within Australia. Another positive is way in which many people have embraced the use of technology during this lock down. This has undoubtedly led to more efficient use of time within many businesses and certainly in our business most clients have welcomed the use of “zoom” or teleconferencing, particularly in cases where people were traveling extended distances to see us.

In recent months I have bought you a number of notes written by economist Shane Oliver who is head of strategy at AMP capital. Whilst we don’t have any investment in AMP capital at this time and each week receive dozens of research and strategy notes from other highly credentialed economists, I find that Shane Oliver manages to convey a message which in some cases are fairly complex, in a plain English and less complex manner which I certainly appreciate. So far the feedback I have received is very positive but please feel free to provide honest feedback on any of the material we send out. The ultimate aim is to inform and educate without trying to impress by focusing on overly complex topics.

The theme of this weeks note is “ What may happen to investment markets in the lead up to the US elections scheduled for November this year?”

This is certainly something that our investment committee has spent a great deal of time pondering in recent months. After a recent run up in markets following the significant fall in March, a fair degree of volatility has now returned, particularly to share markets. This is not unexpected as on the one hand we are facing rising unemployment, increasing debt levels and an ever increasing rise in the number of COVID-19 cases. Coupled with this we have the uncertainty of what will happen in the US election along with a US President likely to embark on further trade wars or other desperate measures to beef up his popularity in the lead up to the November poll. However, pushing back against this is a huge injection of capital by Central banks and the prospect that a vaccine for COVID could only be six to twelve months away.

The most interesting thing we have learnt from this note was the fact that shares have actually performed better under Democrat than Republican presidents. This is somewhat surprising given that Biden has stated he favours increased taxes, greater health spending and more regulation which is more than often associated with weaker economic growth.

  • Peter Kirk, Relationship Manager | Executive Director

The US presidential election – implications for investors

This article was originally published on the AMP Captial Website 30 June 2020 by Dr Shane Oliver Head of Investment Strategy and Economics and Chief Economist, AMP Capital.

You can view the original article here: The US presidential election – implications for investors


Key Points

  • The run up to the US election on 3rd November has the potential to see increased share market volatility if it looks increasingly likely Biden will win and if Trump ramps up tensions with China (and maybe Europe) in response. However, this is likely to be short lived as there is no reason to expect a weaker economy and hence share market under a Biden presidency.
  • Historically, shares have performed better under Democrat than Republican presidents.

Introduction

Investor focus on the US election waned earlier this year after socialist Bernie Sanders dropped out of the Democratic primary race in favour of moderate Joe Biden. At the same time coronavirus became the main focus for markets. However, markets may soon start to pay more attention as the election is rapidly approaching, while Joe Biden is a moderate, he is proposing higher taxes and more regulation and President Trump is not having a good run. Trump’s re-election chances have fallen with a majority of surveyed Americans disapproving of his handling of the pandemic and recent civil unrest at a time when the US has plunged into its deepest recession since the 1930s. The historical record indicates incumbent presidents tend to lose when there is a recession in the two years before the election and unemployment has gone up.

1 Re Election Of Us Presidents Post Recession

Normally at this point past presidents seeking re-election have started to see an upswing in approval, but this is not evident yet for Trump. Rather, consistent with the above, according to Real Clear Politics’ average of polls Trump’s approval rating has fallen to 41.2% over the last two months, his disapproval rating is edging above its 2019 high, opinion polls have Biden leading Trump by around 9 points and Biden is ahead in all 6 “battleground states”, the ‘Predict It’ betting market, which had Trump ahead of Biden up until late May, now has Biden with a 23 point lead and also now has Democrats winning the presidency, the House and the Senate. The Democrats already have control of the House and are likely to retain that, but they need three seats to then along with the Vice President, gain a majority of the Senate. A clean sweep for the Democrats would remove the Senate as a blockage to higher taxes.

2 Trump Job Approval

However, it would be wrong to write Trump off. Polls and betting markets were not so reliable in the 2016 election, there are still four months to go to the election & ongoing civil unrest could see him garner support as a “law and order president” as Nixon did in 1968. And Trump rates more highly on the economy than Biden and this may get a boost if the economy continues to reopen and recover. A rebound in the economy is Trump’s best hope which partly explains why he cheered on reopening from the end of April. However, the rebound in US coronavirus cases in many states in the last few weeks puts all this at risk.


Key Biden policy directions versus Trump

Taxation: Biden plans to raise the corporate tax rate to 28% (reversing half of Trump’s cut to 21%), return the top marginal tax rate to 39.6% (from 37%) and tax capital gains and dividends as ordinary income.

Infrastructure: Biden plans to spend $1.3trn over 10 years.

Climate policy: Biden aims for the US to reach net zero emissions by 2050 by raising the cost of fossil fuels & boosting the development of alternatives (possibly with a carbon tax).

Regulation: Biden is likely to end the era of deregulation.

Healthcare: Biden wants to strengthen Obamacare and limit drug prices.

Trade and foreign policy: Biden would likely de-escalate tensions with Europe and strengthen the alliance, work with international organisations like the World Trade Organisation, work to re-establish the nuclear deal with Iran and adopt a more diplomatic approach to dealing with trade & other issues with China (working with Europe and Asian allies in the process). By contrast a re-elected Trump is likely to double down on his trade war with China and possibly elsewhere including Europe.

Budget deficit: For the near term, the budget deficit is likely to remain high whoever wins, but historically they have fallen under Democrats after rising under Republicans. That said, if the economy proves slow to recover Joe Biden may be more likely to respond with large public sector spending programs aided by ongoing Fed quantitative easing in order to deal with ongoing high levels of spare capacity and unemployment.

Economic impact

On their own higher corporate and top marginal tax rates, increased regulation and an increased cost of carbon which will weigh on energy companies when they are already struggling are negative for the growth outlook. For example, the rise in the corporate tax rate would knock around 6% off earnings per share for S&P 500 companies. In particular, they may reverse some of the supply side boost provided by Trump. However, as with all things economic its never as simple as that.

  • First, the negative impact of tax hikes and increased regulation in the short term could be more than offset by increased infrastructure spending (particularly if some of the revenue comes from those with high saving rates).
  • Second once in office Biden may dampen down his planned tax hikes, particularly if the economy is still weak as is likely.
  • Third, raising taxes on top earners while a negative for incentive may help reduce inequality which has been a key driver of the populist backlash of recent years and has arguably been made worse by Trump.
  • Fourth, Biden’s trade and foreign policy focussed more on strengthening ties with Europe and a diplomatic approach to dealing with China may substantially reduce a source of angst and uncertainty under Trump (which is likely to intensify if he is re-elected).
  • Finally, more stable and predictable policy making reliant on expert advice under Biden may provide a more certain environment for business and so result in increased business investment despite a rise in the corporate tax rate. Don’t forget that the uncertainty caused by Trump’s trade wars offset the boost to investment from his tax cuts.

So, on balance I see no reason to expect a weaker economic and share market outlook under a Biden presidency.


Likely market reaction

Firstly, despite the heightened policy uncertainty the election year is normally an okay year for US shares.

3 Us Market Returns Through The Presidentail Cycle

Since 1927, the election year, or year 4 in the presidential cycle, has had an average total return of 11.2% pa, which is only just below the average return for all years. Of course, this year is complicated by the coronavirus hit to growth and so may well be weak regardless of the election.

Second, the run up to the election could see increased share market volatility if Trump’s prospects look bleak for two reasons: investors may start to fret about the prospects of increased taxes and regulation under a Biden presidency, particularly if it looks like Democrats will win control of the Senate; and Trump may reason that he will have nothing to lose by seriously ramping up tensions with China (and maybe Europe) in a way that threatens the economic outlook, but with the prospect of shoring up his base and rallying Americans around the flag. However, while there may be short term jitters ahead of the election, for the reasons noted in the last section, there is no reason to expect a weaker economy and hence share market under a Biden presidency. Investors may ultimately welcome more reasoned and predictable policy making.

Third, historically US shares have done best under Democrat presidents with an average return of 14.6% pa since 1927 compared to an average return under Republican presidents of 9.8% pa. This has been evident in recent years with good average annual returns under President’s Obama (14.8% pa) and Clinton (19.1% pa) versus terrible returns under President G W Bush (-0.6% pa) but strong returns under President Trump’s first three years (16.3% pa).

However, the best average result has actually occurred when there has been a Democrat president and Republican control of the House, the Senate or both. This has seen an average return of 16.4% pa. By contrast the return has only averaged 8.9% pa when the Republicans controlled the presidency and Congress.

4 Us Market Returns By Political Configuration

Concluding comment

The run up to the US election has the potential to drive increased share market volatility if it looks increasingly likely that Biden will win and raise taxes and regulation and the risk is probably greater if President Trump decides he has nothing to lose and so ramps up tensions with China and maybe Europe. This would weigh on global and Australian shares and the Australian dollar given Australia’s exposure to China. However, this is likely to be short lived as there is no reason to expect a weaker economy and hence share market under a Biden presidency and he is likely to take a less disruptive approach to trade and foreign policy issues.

Quill Group

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