The year 2020 continues to surprise — the pandemic, international border closures, halting of the world economy, a sharp global equity sell-off on the back of coronavirus fears followed by a quick recovery, and recently, record highs for the U.S. equity market. Despite some period of volatility, most global share markets finished the quarter markedly higher on hopes of a viable coronavirus vaccine in coming months, better-than-expected economic data from major economies, and a strong outperformance by technology stocks. The MSCI All Country World Index rose 7.7% to 565 points for the quarter, the S&P 500 Index outperformed all others and lifted 8.5% to 3,363 points and China’s Shanghai Composite Index was up 7.8% to 3,218 points. In comparison, the Australian S&P/ASX 200 Index was down 1.4% to 5,816 points partly due to the lower index weighting to Technology stocks, exacerbated by underperformance in the major banks.

Looking at the share price performance for the Australian sector indices, the standout sectors for the quarter were InfoTech, up 12.3%, Consumer Discretionary, up 7.7%, and Real Estate, up 5.3%. The Utilities sector fell 9.5%, Financials lost 6.9%, and the Energy sector was the weakest, down 15.2%.

The FY20 reporting season in August was generally calm across the market with lower capital raises and better dividends than expected with top line sales supported by government stimulus. The REIT sector in particular reported weaker than expected earnings, especially as rent collection was impacted due to COVID-19. Almost a third of all dividends beat analyst forecasts with notably higher than expected dividends from AMP, Commonwealth Bank, Fortescue Metals, Newcrest Mining, Woodside Petroleum and Super Retail. Looking ahead however, given the uncertainty around the pandemic, companies provided minimal earnings guidance and downward revisions to FY21e earnings was broadly the trend across the market, with the exception of some consumer discretionary, financials (ex-banks) and info tech stocks.

In commodities, gold strengthened a further 5% to US$1,891 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 over 24% to US$123 per tonne on the back of rising steel demand in China and supply constraints due to lower exports from Brazil. The Brent oil price finished almost steady at US$41 per barrel as a depreciating US dollar and the improving global economic outlook played off against each other.

The latest Australian GDP data showed the economy contracted 7.0% quarter on quarter in June 2020 as business investment and residential construction activity weakened and household spending deteriorated sharply. Coming after the March quarter GDP contraction of 0.3%, the economy officially entered recession for the first time since 1991. Also, Australia recorded annual deflation for the first time since March 1998 after headline inflation fell by 0.3% in the year to June 2020 primarily due to lower rents/utilities, lower fuel costs and government’s decision to provide ‘free’ childcare.

The Reserve Bank of Australia (RBA) in its September meeting kept the cash rate steady at an historic low of 0.25% while continuing more bond purchases and then extending its term funding facility to keep financial conditions accommodative for the banks and support credit growth in the economy.

Against the global backdrop of elevated risk, we now expect the global economy to contract by 3.9% in CY20 before returning to growth of 5.4% in CY21. As regards the Australian economy, we forecast a contraction of 4.4% in CY20 as negative household consumption, weaker dwelling construction and private business investment, and lower exports are only partly offset by much higher government spending before it turns around to growth of 2.2% in CY21.

Looking ahead, although Australia and New Zealand seem to have successfully managed the second wave with targeted measures to reduce local transmissions, COVID-19 continues to have widespread global repercussions.

On the political front, the U.S. Presidential campaign continues to gather steam along with the long running trade deal negotiations between the U.S. and China while the major world governments work out the next phase of new stimulus packages and coronavirus related relief bills.

To sum up, investors are likely to remain cautious although the swift and sizeable COVID-19 policy response from central banks and governments has managed to cushion the economic shock and policymakers aim to build a bridge to the other side of the virus. In this regard, a sustained recovery in jobs growth as the labour force returns to work while businesses are able to reopen forms a key to the outlook from here.

Against this volatile economic background, the Australian share market is currently valued on a forward consensus price earnings (PE) ratio of 18.2x, which is 25% above the long term average of 14.6x. However, the forward consensus dividend yield for the Australian share market is 3.5% (80% franked) — or 4.7% grossed-up — which remains attractive.

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