Restarting the Aussie economy
Australia is the most successful Western economy in containing COVID-19. With safe restart capabilities in place, a restart is underway – starting with elective surgery and some retailing. In this note, we analyse the implications of a V- or U-shaped recovery.
In our view, Australia is tracing a V- rather than a U-shaped recovery for five reasons: i) containment success in the space of ~5 weeks; ii) criteria for a safe restart met, and restart underway; iii) unprecedented monetary and fiscal support and stimulus – together ~13% of GDP – beginning to flow; iv) windfall gains from the oil price crash and Asia’s first-in, first-out (FIFO) recovery adding ~1-2% to GDP; and v) Australia’s data is mixed, not collapsing.
The differences between the U- and V-recovery scenarios are stark: real GDP – instead of declining 6% and then rebounding 7% – declines just 1.5% in 2020 and then booms 8.5% YoY in 2021. Earnings – instead of falling 30% and then rebounding 40% – fall 5-10% in 2020 and then boom as much as 50% in 2021.
What is discounted by the market? Assuming a 15% decline in earnings expectations, midway between the V- and U-scenarios, the market is on almost 16x, an attractive trough valuation, particularly given 0-1% rates. The yield is an above-average 4.4%, and price-to-book of 1.6x is 26% below average.
Investment implications: We reiterate our bullish outlook for, and overweight allocation to, Australian equities, expecting a return to the 6000 ASX 200 level on a 12-month view, a total return of about 18%. Within our Australian portfolio, we emphasise resilient businesses with strong market position and balance sheets, including financials such as Commonwealth Bank, Macquarie Group, IAG and Steadfast, consumer discretionary stocks Aristocrat Leisure and Wesfarmers, resources stocks BHP and Woodside Petroleum, and industrials Amcor and James Hardie.