The RBA-U, Treasury-u or EL&C Baillieu-V recovery?
The International Monetary Fund (IMF) predicts Australian real GDP will fall 6.7% in 2020 and recover 6.1% in 2021, similar to our U-scenario. The Reserve Bank of Australia (RBA) has outlined a slightly less dire baseline scenario – what we call the RBA-U – where real GDP falls 5% in 2020 and then recovers 4% in 2021. The Treasurer and Prime Minister have presented Treasury analysis suggesting that real GDP was tracking down more than 10% in 2Q20, but this should improve given the three-stage restart underway and stimulus. This Treasury-u is a far better outcome than the RBA is assuming.
In contrast to the IMF-U, RBA-U and Treasury-u, we see Australia tracking the EL&C Baillieu V-shaped scenario for five reasons: i) world-beating successful containment in ~6-7 weeks; ii) a confidence-rebuilding restart process, which is underway; iii) overwhelming monetary and fiscal support and stimulus, together ~13% of GDP, with 4.4% in late-April-May; iv) windfall gains from the oil price crash and Asia’s FIFO recovery adding ~1-2% to GDP; and v) five Australian quirks adding ~2% to GDP!
The differences between the U- and V-recovery scenarios are dramatic: in the U-, earnings fall 25-30% in 2020 and then rebound 30-40% in 2021; in the V-, they fall 5% in 2020 and then boom about 50% in 2021.
What is discounted by the market? 12-month forward earnings estimates have fallen 15.5% and are ~2-5% above the U-scenario. The PE on 2021 earnings is between an average 14.5x on U- earnings and 10x V- earnings. In our view, the market should trade on 16x, given zero rates. We move our ASX 200 index target toward the V- scenario, lifting it 500 points to 6500, up over 20%.
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