Super withdrawals, equity supply, ASX 200 performance
Despite significantly outperforming global peers in navigating the COVID-19 pandemic – for details please see our note, ‘Ranking recoveries: aVstralia, aVia, Usa and eUrope’ – the Australian equity market has materially underperformed. Two possible explanations for this underperformance are super fund withdrawals, permitted as part of the Federal Government’s fiscal response to COVID-19, and heavy equity issuance by Australian companies, somewhat reminiscent of the global financial crisis (GFC).
We find neither explanation compelling. Super withdrawals to date are about $11.7 billion and should reach close to Treasury’s estimated $27 billion over 2Q-3Q20. Even if a disproportionate 50% of these withdrawals is met by selling Australian equities, this represents ~0.75% of total market cap. It is more than likely to be around half that.
Equity issuance over the past two months has reached ~$18 billion, or ~1% of market cap. While far smaller than the GFC, we estimate this has had a small negative impact on market performance. Given stronger balance sheets and our economic outlook, we expect a large part of the raisings has happened.
That said, it seems likely that these two factors have helped depress market sentiment, contributing to Australian underperformance. Looking ahead, as these sources of supply dissipate over the next 2-3 months, fundamentals should reassert themselves, leaving a market substantially undervalued on a V-shaped recovery, and still undervalued on a U-shaped recovery. We reiterate our ASX 200 12-month target of 6500 and our preference for resilient and restart stocks.
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