End of Quarter Review – June 2021

It is now over a year since the pandemic started that presented unprecedented challenges on many fronts. The COVID-19 vaccine rollout is now in full swing worldwide and most global share markets have staged an optimistic recovery to emerge on the ‘other side of COVID-19’. Additional stimulus from various central banks, the continued rollout of various viable vaccines, and better-than-expected economic data from major economies have all culminated into an overall strong finish to fiscal year 2021 despite some periods of volatility accompanied by rising bond yields concerns and increased inflationary expectations.

The MSCI All Country World Index rose 37.2% to 720 points for the fiscal year, the S&P 500 Index lifted 38.6% to 4,298 points and China’s Shanghai Composite Index was up 20.3% to 3,591 points. Domestically, the Australian S&P/ASX 200 Index rose 24.0% to 7,313 points with certain sectors bolstered by relaxing social restrictions, re-opening of industries, and a quick return of pent-up consumer demand. The Consumer Discretionary and Information Technology sectors were the standouts— rallying 42.6% and 38.9% respectively. By contrast, the Utilities sector was the weakest, down 22.9%, and the Healthcare sector underperformed, rising only 5.0%.

In commodities, gold finished the fiscal year slightly lower, down 0.7% to US$1,769/ounce after rallying to a pandemic-era high of US$2,050/ ounce in August 2020 supported by investors seeking a ‘safe haven’ in a global economy with hefty quantitative easing and very low bond yields. The quoted iron ore price more than doubled this fiscal year, sky-rocketing 117% to US$213/ tonne driven by a combination of robust Chinese demand and supply constraints and Brent oil has surged 83% to ~US$75/barrel on the back of the ‘reflation’ trade and strong global demand.

Domestically, the Reserve Bank of Australia (RBA) continues to hold the cash rate at an historic low of 0.10% noting its no rate hike stance until 2024 at the earliest because sustaining the economic expansion means “ensuring that demand continues to be supported for as long as spare capacity remains”. The RBA is also continuing its quantitative easing program (QE) to purchase bonds with maturities of around 5 to 10 years in order to control the yield curve and further support economic recovery.

The Australian dollar finished fiscal year 2021 at ~US75 cents, up 10% from ~US68 cents at the end of fiscal year 2020, and we forecast US78 cents in December 2021.

The latest Australian GDP data showed the economy expanded a solid 1.8% in the March 2021 quarter to be up 1.1% year-on-year (and now 0.8% above the December 2019 quarter pre-pandemic level) supported by higher dwelling construction activity, a rise in private investment and improved household consumption. The most recent underlying inflation rate of 1.1% continues to remain below the RBA’s target range of between 2% and 3%. The unemployment rate fell to 5.1% in May, and with employment already above pre-COVID levels, the rate is now expected to decline to 4.4% by the end of calendar 2021.

Against the global backdrop of an abating pandemic crisis and economic recovery, we now expect the world economy to expand by a solid 5.8% in CY21 and then a lower 4.0% in CY22. As regards the Australian economy, we forecast a rapid expansion of 5.7% in CY21 and then 3.2% in CY22.

While COVID-19 still continues to dominate the global landscape, there are a number of tailwinds in the world equity markets as the economies continue to open and recover, vaccine rollouts expand, and more people return to work in person and seek out travel and experiences.

Domestically, Australia has managed the pandemic relatively well underpinned by a highly accommodative monetary policy and fiscal stimulus, a gradual vaccine rollout and the absence of widespread virus transmissions. Therefore, positive health outcomes and strong economic data remain the key themes for fiscal 2022. In this regard, while the JobKeeper subsidy payments ended in March, the recent 2021 Australian Federal Budget provided $96 billion in additional stimulus over the next five years to support the economy, particularly in business tax incentives and aged care.

Against this background, the Australian share market is currently valued on a forward consensus price earnings ratio of 17.7x, which is 21% above the long term average of 14.6x. The forward consensus dividend yield for the Australian share market is 3.9% (80% franked) —or 5.2% grossed-up.

All up, as economic growth continues to recover, we expect an on-going rotation out of ‘growth’ stocks towards ‘value’ and cyclical stocks. At a sector level, this implies a structural shift towards banks/financials, travel/tourism, energy, and resources. For the benefit of our clients, we recently put together a list of our favoured cyclical recovery stocks. Our ‘After COVID-19 Recovery Stocks’ are: Aristocrat Leisure,  ANZ Banking Group, Macquarie Group, Premier Investments, Flight Centre Travel Group, Qantas Airways, Mirvac Group, BHP Group, Worley, and Origin Energy.

We would also like to reiterate our ‘Champion Stocks’ which  have a long term positive thematic over the coming years and, therefore, we are not particularly concerned about the current year’s investment arithmetic or the analyst’s twelve month buy-hold-sell rating. Our ‘Champion Stocks’ are: Amcor, Brambles, Challenger, CSL, Goodman Group, Lendlease Group, Netwealth Group, Sonic Healthcare, and Transurban Group.

These and more reports can be accessed online via the ‘client-only’ area of the Bell Potter website https://clientaccess.bellpotter.com.au/login