Monthly Perspective | September 2020

Markets were largely flat over the past four weeks but volatility returned as the end of August saw a spike higher driven by tech, with Apple the notable culprit, followed by a subsequent correction in tech in the first couple of weeks of September. At the time of writing, the U.S. S&P 500 index was up 0.32% over the past month. Similarly, the Euro STOXX 50 was up 0.36%, the Nikkei 225 was up 0.57% whilst the CSI 300 index fell 0.99%.

Locally, a comparatively poor earnings season, especially after the positive momentum driven by an exceptionally strong international earnings season relative to initial expectations, saw the S&P/ASX 200 underperform to shed 3.7% over the past month. It is now one of the worst-performing developed market indices year to date.

Commodities remain on an uptrend, driven by base metals, and iron ore are hitting fresh six-year highs. Gold and precious metals are largely flat whilst oil has retraced some of the recent rebound, with WTI crude falling below the USD $40 mark again.

Bond yields fell over the month too, as the U.S. Federal Reserve announced a shift to average inflation targeting and global central banks continue to maintain their accommodative stance. The Australian 10-year bond yield currently sits at 0.86%.

The Australian Dollar rose again to above 73 U.S. cents as the U.S. Dollar continued to slide.

Economic overview

Australia’s record-breaking streak of 29 years without a recession officially ended as of the end of June 2020, with GDP coming in below expectations at -7% for the quarter. More recent data has been more positive, however, with indications that Australia, like the rest of the world, is already on the recovery path, though there are still many potential risks that could derail the recovery.

The housing market largely remains resilient with prices largely stabilising across major cities with Melbourne being the understandable exception. Home loan volumes rebounded strongly too, posting 10.7% month on month growth in July vs expectations for a slight fall. Home sales also continue to rebound but still have quite a bit to recover pre-COVID volumes.

Business confidence improved a little but remains weak, whilst conditions deteriorated highlighting that it won't be a smooth recovery path, with employment indicators turning lower again. The Reserve Bank of Australia continues to provide support, recently stepping up the Term Funding Facility by another $57 billion, a source of low-cost funds for banks in the effort to ultimately lower the cost for borrowers.

Global indicators are also supportive of a global recovery and have been indicating a continued rebound in both manufacturing and services. However, the recovery in employment is not as clear, with employment indicators such as weekly jobless claims in the U.S. stagnating. The U.S. also added slightly less jobs than expected in August, though the unemployment rate fell to 8.4%. Despite this, consumer spending is almost back to pre-COVID levels in the U.S., though the impact of the stimulus cliff is yet to be seen and is a real risk as a deal between Democrats and Republicans looks less and less likely to materialise.

Australian Reporting Season

Earnings season in Australia was poor as there were less earnings beats than the historical average, especially relative to the global earnings season that saw strong results compared to expectations. As per the chart below, earnings fell by 26% for the S&P/ASX 200 and by 18% for the MSCI All Country World Index, which includes emerging markets.

 

This can be partially attributed to the composition of the domestic index. Global indices have a far higher weight in the Technology sector and even other segments are driven by large companies that are widely regarded as tech or tech-enabled. A few notable examples would be Amazon in the Consumer Discretionary sector and Alphabet (Google’s parent company) in the Communications sector. Meanwhile, the domestic market remains dominated by Financials which continues to disappoint as it has done over the past few years as seen in the chart below.

 

This has also manifested in much larger dividend cuts, driven largely by Financials once again. The domestic market has historically had a much higher yield of over 4.5% compared to the MSCI World at about 2% for a difference, or spread, of about 2.5%. That spread has now shrunk to under 2%, with the domestic market now expected to yield closer to 3.5%.

 

Source: JP Morgan as at 1 September 2020

Whilst analysts have shifted the earnings recovery expectations to the 2021 financial year, a notable proportion of companies continue to refrain from providing guidance, with many still seeing declines for at least the current half to the end of 2020. This highlights the continued uncertainty around the business and operating environment as the threat of COVID-19 remains.

 

Due to the current environment, there has been a major dislocation in performance between companies guiding for growth and the rest of the market, leading to sharp outperformance in the Technology and Healthcare sectors as the near-term future for those segments remain visible and investors pay up for certainty. However, there is a price for everything, with forward P/E ratios for Healthcare at 38x and Technology at 60x, relative to the long-term historical averages of 22x and 20x respectively. Meanwhile, the Materials and Financials sectors trade on 15x forward P/Es versus their 13x historical averages. Given the dislocation in prices between sectors, it is now even more important that investors need to understand the prospects of their investments relative to the price they are paying. In the long run, it is likely that the notion of “price is what you pay; value is what you get” will still hold true.

 

Want more information?

This month’s perspective highlights that market sentiment on all asset classes is constantly changing. It is important for us to quickly recognise any threats, to preserve your investment capital or to identify early investment opportunities to maximise any return advantages. At Partners Wealth Group we don’t get complacent with the current state of play and constantly monitor investments and your portfolios.

If this article has raised questions regarding your personal situation, please contact your Partners Wealth Group advisor directly or on 1800 333 143.