End of Quarter Review Market Review header

After a year of unprecedented challenges from the coronavirus (COVID-19) spread around the world and large swings in investor sentiment globally, the March 2021 quarter was noteworthy for renewed hope and optimism as the global COVID-19 case rate decreased and viable COVID vaccines began to be rolled out worldwide with bio-medical companies scaling-up production to meet demand. Most share markets finished this quarter higher despite some periods of volatility accompanied by rising bond yields and increased inflationary expectations.

The MSCI All Country World Index rose 4.2% to 673 points for the quarter, the S&P 500 Index outperformed all others and lifted 5.8% to 3,973 points, China’s Shanghai Composite Index edged down 0.9% to 3,442 points, and the Australian S&P/ASX 200 Index was up 3.1% to 6,791 points.

Looking at the share price performance for the Australian sector indices, the standouts for the quarter were Financials up 11.3%, Consumer Discretionary up 7.4%, and Communications Services up 7.1%.  The Utilities sector fell 2.6%, the Healthcare sector declined 2.9%, and the Information Technology sector was the weakest, down 11.5%.

Domestically, investors used the reporting season in February to ascertain the depth of the fallout from COVID-19 to the real economy and therefore welcomed earnings that beat analyst forecasts. We had better-than-expected results from the banking sector that benefitted particularly from the large fall in bad debt provisions along with some revenue growth. Large resources companies reported strong cash flow generation and low levels of debt, which translated into positive dividend surprises from BHP Billiton, Rio Tinto, Newcrest Mining, and OZ Minerals. Outside of resources, Suncorp Group, Tabcorp Holdings, Domino’s Pizza Enterprises, and Platinum Asset Management also reported higher-than-expected dividends.

In spite of an overall strong reporting season and initiation of the vaccine rollout program in Australia, the S&P/ASX 200 underperformed its global peers as the Australian 10-year bond yield has now risen from 0.97% at the end of calendar 2020 to the current 1.80% on the back of higher economic growth and inflationary expectations.

In commodities, gold retreated 10% over the quarter to US$1,708/oz but the Brent oil price finished the quarter markedly higher, rising 22% to US$63 per barrel, partly driven by the “reflation trade” and vaccine optimism, and the quoted iron ore price strengthened a further 2.9% to US$165 per tonne.

End of Quarter Review Investment Environment header

The Australian economy expanded by a solid 3.1% in the December 2020 quarter supported by growth in household spending on both goods and services and higher dwelling construction activity.

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. 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 support economic recovery.

The Australian dollar finished the quarter at ~US76 cents, slightly down from US77 cents at the end of December 2020 and we forecast US79 cents at the end of 2021.

Against the global backdrop of an abating pandemic crisis and economic recovery, we now expect the global economy to turnaround from a contraction of 3.6% in CY20 to growth of 5.5% in CY21. As regards the Australian economy, we forecast growth of 4.4% in CY21 to follow a contraction of 2.4% in CY20.

End of Quarter Review Share Market Outlook header

The Australian share market is currently valued on a forward consensus price earnings ratio of 17.6x, 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). However, the overall macro backdrop continues to be supportive as global economic data momentum remains strong, the vaccine rollout has raised hopes of an economic recovery in 2021, and major governments have extended fiscal support to their respective economies. Particularly in Australia, positive health outcomes and strong economic data remain the theme for 2021 driven by the absence of widespread virus transmissions, which has allowed the domestic economy to rebound rapidly. Large fiscal stimulus and low interest rates have enabled a consumption-driven economy and the RBA has continued its accommodative policy stance in spite of the recent rise in global bond yields.

All up, as economic growth continues to recover and accelerate, we expect a rotation out of ‘growth’ stocks towards ‘value’ and cyclical stocks, which have underperformed the overall market in recent years. At a sector level, this implies a structural shift towards cyclical sectors such as banks/financials, travel/tourism, energy, and resources.

In this regard, we will soon be putting together an updated list of both our ‘Champion Stocks’ and ‘After COVID-19 Recovery Stocks’. These and more reports can be accessed online via the ‘client-only’ area of the Bell Potter website.

Please don’t hesitate to contact me if you wish to discuss your portfolio or require any additional information.

Important Disclaimer—This may affect your legal rights: Because this document has been prepared without consideration of any specific client’s financial situation, particular needs and investment objectives, a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the proper authority of such licensee, who has provided you with this report by arrangement with Bell Potter Securities Limited) should be consulted before any investment decision is made. While this document is based on the information from sources which are considered reliable, Bell Potter Securities Limited, its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility to inform you of any matter that subsequently comes to its notice, which may affect any of the information contained in this document. This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. This is general investment advice only and does not constitute advice to any person.
Disclosure of Interest: Bell Potter Securities Limited receives commission from dealing in securities and its authorised representatives, or introducers of business, may directly share in this commission. Bell Potter Securities and its associates may hold shares in the companies recommended.