This calendar year proved to be a year of unprecedented challenges with much larger swings than we have had at times since the global financial crisis. After a very strong start to the year, investors and markets grappled with the uncertainty and severe volatility brought upon by the coronavirus (COVID 19) spread around the world. March 2020 was particularly noteworthy for large swings in investor sentiment before a quick rebound on the back of substantial levels of fiscal and monetary stimulus by various governments and central banks that helped exit 2020 on renewed hopes and optimism.
The March and June quarter 2020 also saw the Australian economy contract and enter recession for the first time in 29 years – impacted by the coronavirus as well as drought and bushfires. There had also been a slew of other worries including the ongoing US-China trade war and the rising China Australia trade/ tariff disputes particularly surrounding Australian coal, barley, timber, beef, and wine exports. Uncertainty surrounding the outcome of the recently held US elections further added to investor caution and when Joe Biden was declared the 46th president elect of the United States, most markets welcomed a Biden victory along with a global rally on the back of a viable vaccine development news. This together with better-than-expected economic data from major economies, and a strong outperformance by technology stocks culminated into an overall strong finish to calendar 2020.
The MSCI All Country World Index rose 14.3% to 646 points for the calendar year, the S&P 500 Index outperformed all others and lifted 16.3% to 3,756 points and China’s Shanghai Composite Index was up 13.9% to 3,473 points. In comparison, the Australian S&P/ASX 200 Index edged down 1.5% to 6,587 points partly due to the lower index weighting to Technology stocks, exacerbated by underperformance in the energy and utilities stocks. The Information Technology and Materials sectors were the standout — rallying 56.4% and 13.4% respectively. By contrast, the Energy sector was the weakest — down 29.9% and the Utilities fell 21.5%.
In commodities, gold strengthened a solid 25% to US$1,898 per ounce supported by investors seeking a ‘safe haven’ in a global economy with quantitative easing and bond yields near zero. The quoted iron ore price rose ~74% to US$160 per tonne driven by a combination of robust Chinese demand and supply constraints in Brazil. The Brent oil price finished the year lower at ~US$52 per barrel as the effect of a COVID-19-induced slowdown and an increase in production by OPEC along with a depreciating US dollar played off against each other.
Following a sharp 7.0% contraction in June 2020 quarter, the Australian economy expanded 3.3% in the September 2020 quarter supported by a growth in household consumption and easing COVID-19 restrictions across most states and territories that allowed some economic activity to resume.
Domestically, the Reserve Bank of Australia (RBA) cut the official cash rate three times during the calendar year — 25 basis points twice in March including an emergency out of cycle meeting and a further 15 basis points cut in November 2020 — to end the year at a historic low of 0.10%. The RBA also announced a $100 billion quantitative easing program (QE) to purchase bonds of maturities of around 5 to 10 years over the next six months in order to support economic recovery and assist in jobs creation.
The Australian dollar also hit a low of ~US57 cents during March 2020 before recovering steadily to finish the year at ~US77 cents as low interest rates, trade tensions, and depreciating US dollar all played off against each other along with higher commodity prices.
Against the global backdrop of an abating pandemic risk and a gradual but cautious economic recovery, we now expect the global economy to turnaround from a contraction of -3.9% in CY20 to a growth of 5.0% in CY21. As regards the Australian economy, we forecast a growth of 2.2% in CY21 to follow a contraction of -4.3% in CY20 supported by various monetary and fiscal actions along with containment of the coronavirus.
Looking ahead, it is evident that COVID-19 continues to have widespread repercussions and still dominates the global landscape. While the US and Europe continue to report high number of cases and there are fresh lockdowns anticipated, there are several effective vaccines that are starting to be distributed across the globe. The timing of vaccine roll-out and success achieved in stemming the pandemic is likely to drive a sustained recovery in jobs growth as the labour force returns to work while businesses are able to reopen. In this regard, it is worth noting that so far, the economy has recovered 75% of the jobs lost since the pandemic. The rapid reopening of the economy, continued fiscal support, low interest rates is all likely to further assist in a labour market recovery and forms a key to the outlook from here.
Against this cautious economic background, the Australian share market is currently valued on a forward consensus price earnings (PE) ratio of 19.2x, which is 31% above the long term average of 14.6x. However, the forward consensus dividend yield for the Australian share market is 3.4% (80% franked) — which remains attractive in the current environment. We also forecast further gains in the market and our current S&P/ ASX 200 index target is 6,900 at the end of calendar 2021. This is 4.8% above the 31st December 2020 close of 6,587 (excluding dividends).
We would 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 (in alphabetical order): Amcor, Brambles, Challenger, CSL, Goodman Group, Lendlease Group, Netwealth Group, Sonic Healthcare, and Transurban Group. Our research reports can be accessed online via the Client Access part of our website.