MEDIA RELEASE: The ‘return to normal’ in Australia, and likelihood of a COVID-19 vaccine, means markets have left behind the despair phase and are now moving from a ‘hope’ to a ‘growth’ phase, with a positive outlook for 2021, according to investment managers from SG Hiscock & Company.
Hamish Tadgell, Australian equities portfolio manager, said the huge coordinated policy response from central banks and governments around the world is supporting a more sustainable growth recovery for equity markets.
“Following the fastest despair phase in history, we have experienced one of the strongest hope-based recovery phases we’ve ever seen,” he said.
“On average, it has taken around three years for the market to return to its previous peak earnings level following a downturn. However, the event-driven nature of this crisis, coupled with the paradigm change in fiscal policy support and rise in household savings, makes it very different to the post-GFC recovery. This provides the potential for a much faster return to pre-crisis earnings.
“We are currently tilting our portfolio to capture the shift from hope to growth and in particular seeking to reallocate more towards quality cyclical companies that will benefit from the return to normal. This includes energy companies such as Woodside Petroleum and Cooper Energy, and we’ve also increased our weighting towards banks, which are now at our highest level in over 10 years.
“Nonetheless there remains uncertainty around how long we will have to live with the virus and the timing of a vaccine, and there is a need to remain vigilant. There will no doubt be bumps in the road with the manufacturing and distribution of the vaccine and path of earnings recovery. At this time, more than ever, a disciplined and active investment approach is required.”
Mr Tadgell added that the US election has been an important catalyst, along with recent vaccine news for markets to push higher.
“A Biden victory and Republican controlled Senate has been embraced by markets. However, we are keeping a close eye on the run-off elections in Georgia in the US. If the Democrats were to win, this could see them control the Senate and raise concerns of a more radical legislative agenda and less market friendly regulatory reform..
“In addition, the February reporting season in Australia will be very important. It is not uncommon for there to be some bumps in road as as the economy and markets transition from hope to growth and reality takes time to catch-up to expectations. This may see some temporary recalibration of expectations for certain stocks and sectors after such a strong run. But overall, we see the drivers for a pick up in earnings growth remaining intact,” Mr Tadgell said.
Grant Berry, AREIT portfolio manager, said the recent news of a vaccine has been a wake-up call for markets.
“In Australia, we’ve already gone beyond ‘COVID-normal’ and the market transition triggered by news of an effective vaccine is only just getting started.
“There has been some debate about whether the shift towards working and shopping from home will be permanent, and how this will affect companies – in particular listed real estate trusts in the office and retail sectors.
“However looking back to the years immediately following the Spanish Flu pandemic, there was huge pent-up demand which resulted in the consumerism and exuberance of the Roaring Twenties.
“We believe that we will see a similar swing towards getting out and about, which will see a return in most part towards the office and a tailwind for the retail sectors, as well as areas such as hospitality and tourism.
“We are already seeing retail foot traffic slowly returning to pre-COVID levels and we believe the retail sector is coming into a positive environment in the lead-up to Christmas.
“An interesting indicator is the household savings rate, which is at its highest level since the 1970s. The primary driver for this level of savings is that people don’t need to spend as much if they aren’t getting out and about. However as restrictions continue to lift and people return to their usual habits, this cash is likely to flow back into the economy and in particular into the retail sector.
“Therefore, we are positioning for the recovery trade, and there are some very strong and compelling opportunities in real assets, which offer investors a very attractive opportunity for income yield,” Mr Berry said.