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Financial market and economic update - September 2020

Written and accurate as at: Sep 16, 2020 Current Stats & Facts

It has been an interesting month in markets. The S&P 500 Index reached 12-month highs with financial markets brushing off March's COVID-19 panic. There have been many discussions about how only a handful of stocks have driven the sharp rebound. Only a tad over a third of stocks has had a positive gain over the year. Leading stocks in the technology sector have been the winners, with Alphabet Inc (Google), Amazon.com Inc and Apple Inc rebounding strongly from March. Essentially, growth and quality stocks have done well, and the impact of COVID-19 on such companies has been minimal relative to other sectors. In some instances, the pandemic has accelerated growth for online retail businesses such as Amazon.

On the other hand, almost two-thirds of stocks have declined in value, and there have been notable losers. Airlines, retail property and infrastructure assets such toll roads and airports have been losers on the back of COVID-19.

Investors are wondering, should they support the 'winners', or to look for bargains amidst the 'losers'.  Having adequate diversification has never been more critical.  Current market conditions may be favourable to quality/growth companies, particularly given the low-interest-rate environment whilst. Equally, the value part of the market could make further sense given some of the bad news has lowered the price of some of these sectors. 

While the current market dynamics are different to that experienced during the tech bubble, there rings a similar theme.  The narrative that 'value investing was dead, and growth companies prospered' is again being questioned. History generally doesn't repeat, but it can rhyme. Ensuring that portfolios are not too concentrated on one part of the market and they remain diversified, particularly in an environment where uncertainly persists, remains important

Australian Equities

Australian shares rose 2.8% in August. IT and Consumer Discretionary were the top returning sectors. Once again earnings season was dominated by the dire effects of COVID-19 as companies cut dividends and increased cash holdings. Appen (-2.6%) reported 1H20 results in September, with revenue growth of 25% in the same quarter last year. Relevance was the largest contributor, with revenue growth of 24%; however, Speech and Image revenue fell 20% following a breakout result in 1H19.

IOOF Holdings (+1.5%) announced the acquisition of MLC for $1.44 billion, which will be partially funded via an entitlement offer and placement. A2 Milk Company (-11.8%) reported revenue and EBITDA growth of 33% on the corresponding prior period. Infant formula was the main driver of the result, supported by a 65.1% increase in Chinese sales. CSL (+5.9%) announced in September it had signed Heads of Agreements with the Australian Government and AstraZeneca to supply two potential COVID-19 vaccines within Australia following successful clinical trials, however, AstraZeneca has halted the trial to investigate an adverse reaction from a study participant in the UK.

Global Equities

The S&P 500 Index rose 7.2% in US dollar terms, ending August at record highs and fully recovered from its March low. The rebound in global equities has been led by large-cap growth companies, which have benefitted from the persistently low rate, low growth environment.

However, the start of September saw some pressure taken out of extended valuations, especially among US technology shares. In the first week, the NASDAQ fell 6.4% in price terms from Wednesday's record high. Electric car manufacturer Tesla gained 74.2% in August and fell 16.1% in the first week of September but was still 400% higher on the start of 2020.

One of the heroes of remote work, Zoom Communications, released its June quarter results at the end of August, which included a 355% rise in revenue on the corresponding prior period, soundly beating expectations. Zoom's share price rose 28.0% in August but fell 19.2% in the first week of September.

The MSCI World Ex-Australia Index gained 3.5% in Australian dollar terms in August, while the MSCI Emerging Markets Index fell 0.9%. European shares pushed higher, albeit not as strong as their US counterparts, with the STOXX Europe 600 Index posting a 4.2% gain. In Asia, Japan's Nikkei 225 Index rose 6.6%, Hong Kong's Hang Seng Index rose 2.5%, and China's CSI 300 Index rose 2.8%.

Fixed Interest

Yields rebounded from fresh record lows in August as risk-on sentiment prevailed over the month. The US 10-year Treasury yield hit a low of 0.51% before rising to end the month at 0.71%, while Australia's 10-year yield rose from its low of 0.82% at the start of August to 0.98% at month-end.

As widely expected, the Reserve Bank of Australia left the cash rate and yield curve control target unchanged at 0.25% at its September meeting, but increased its Term Funding Facility (TFF) to $200 billion and extended its availability until the end of June 2021. The TFF was established in March to provide up to $90 billion of credit to banks at a fixed rate of 0.25%. Commenting on the outlook, the RBA noted the government has balance sheet scope for continued fiscal support while also stating it is considering further monetary policy measures to support the economy.

The US Federal Reserve issued a revised Statement on Longer-Run Goals and Monetary Policy Strategy, which introduces flexible average inflation targeting (coined FAIT by some) to compensate for periods where inflation runs below the 2 per cent target (such as following an economic downturn). Yield curve targeting, which is used by some central banks, including the RBA, went unsupported, with the consensus view that it "would likely provide only modest benefits in the current environment."

Listed property

Australian listed property gained 7.9% in August but remained down 17.7% over the past 12 months. Scentre Group (+10.8%) announced 1H20 results, reporting a statutory loss of $3.6 billion, primarily due to property devaluations of $4.1 billion. Excluding devaluations, EBIT fell 32.7% to $637.4 million after accounting for an expected credit charge of $232.1 million about likely uncollectable rents and additional credit risk associated with tenants due to COVID-19.

While not in a position to provide guidance, Scentre outlined trading activity is showing signs of recovery, with 93% of stores trading and customer visits up to 84% on the corresponding prior period (both figures excluding Victoria).  Charter Hall Group (+18.9%) was another of the top gainers in August, reporting a jump in operating earnings of 46.3% to $322.8 million with net profit climbing 47% and distributions up 6% to 35.7 cents per share.

Globally, developed market REITs returned 1.8% in Australian dollar hedged terms. In the US, REITs were flat over August, with hotels (+10.8%) and regional malls (+6.7%) the biggest gainers. Despite near-perfect rent collection through the pandemic, office property (-3.1%) is battling the 'work from home' paradigm, which is putting pressure on the long-term outlook.

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