Bond yields fell to record low levels in the depths of the COVID-19 downturn in March and remain there – G7 and Australian 10-year yields are 0.4% and 0.9% respectively – despite powerful equity market rallies and rebounding key leading indicators. In 2009, 2012 and 2016 bond yields rose when equities rallied and growth indicators strengthened (Figure 1). So who is right, bonds or equities?
Yesterday was a significant day for Australian equities for three reasons:
Following the COVID-19 driven sharp declines in economies and equity markets in March-April 2020, the key now is the signs of progress toward recovery in the leading global economies and Australia, and their implications for markets.
Australia is in the early stages of a strong V-shaped recovery, which we expect to more than offset fears of a fiscal cliff in 4Q20 when the Government’s JobKeeper and JobSeeker programs are set to expire.
Today’s Australian retail sales figures were dramatically better-than-expected, with sales rising a record 16.3% MoM in May and 5.3% YoY (Figure 1). At the May monthly level, retail sales are 4.1% above their pre-COVID-19 level! This is consistent with a V-shaped recovery for Australia.
In our view the Australian economy and equity market should decouple from the US and materially outperform over the next 6-12 months. In this note we find that Australia is better placed than the US on 7 of 8 key points of comparison.
This is an extremely fast-moving cycle: in the space of just three months Australia has experienced a spike in COVID-19 new cases, lockdown restrictions, deep declines in employment and spending, an unprecedented policy response, and world-leading containment and restart successes. In such a cycle it is more important than ever to stay abreast of current indicators and anecdotes and to avoid relying on outdated commentary.
Last Friday the Australian Treasury and Taxation Office announced a $60 billion error in the forecast cost of the Federal Government’s leading JobKeeper program.
There are three major implications of this major revision.
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.
Find out about our resilient and restart stocks here:
We use four criteria to assess the responses of different countries and regions to the COVID-19 shock:
Find out about our overall rankings here:
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.
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. Read about them here:
Australia is beginning to restart sectors deeply affected by measures to contain COVID-19. We expect Australia to achieve a successful, V-shaped recovery for five reasons: i) world-leading success containing COVID-19; ii) the satisfaction of rigorous criteria for a safe restart; iii) the unprecedented fiscal and monetary support and stimulus that is beginning to flow; iv) the windfall from the oil price crash; and v) the support from Asia’s FIFO recovery.
These 10 stocks should benefit…
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.
The COVID-19 shock is driving a sharp fall in economic activity. In our view, at a macro-level Australia is making solid progress toward an effective response, given: i) containment measures slowing the growth in cases below 5% per day; ii) monetary stimulus, with rates at effective zero and RBA asset purchases of A$36 billion in twelve days; iii) unprecedented fiscal support measures of ~10% of GDP; iv) fiscal stimulus measures of ~1.5% of GDP; and v) the oil price windfall of ~1% of GDP.
This year’s sharp bear market and the Federal Government’s unprecedented fiscal response provides an attractive entry point into the Australian equity market. We see six positives for the Australian market:
The Reserve Bank of Australia’s (RBA) March 2020 50bps of rate cuts and 0.25% target yield for the 3-year Commonwealth bond has been overshadowed by rate cuts of 65-150bps and quantitative easing (QE) programs of 3.3-8.5% of GDP by the world’s major central banks.
The Brent oil price has fallen ~50%, or ~US$30 per barrel (bbl), year-to-date (Figure 1), driven by three factors: i) the impact of COVID-19 on China, with the Government lockdown driving a sharp decline in China oil demand; ii) the global spread of COVID-19, with a substantial hit to global travel and oil demand; and iii) the collapse of the OPEC plus Russia oil cartel and their subsequent moves to increase production and take market share.
| Global equity markets have fallen sharply over the past 20 days, declining 27.0% from record levels (or 22.4% in AUD-terms). For Australia, this sharp bear market is now the fourth worst in the past 40 years. |
A rapid correction on COVID-19 concerns has erased a large part of the global equity rally of the past year, despite the positives of easy monetary policy, the US-China trade deal, the resolution of Brexit and persistent low inflation. Bond yields have fallen sharply to new record lows, whilst industrial commodities and the Australian dollar have weakened. In this note, we provide our regular update of key investment themes, major asset class views and the implications for tactical-dynamic asset allocation.
| The ASX 200 equity index rose 18.4% YoY in 2019, driven by a strong global rally, the surprise Morrison Federal Government re-election and 75bps of Reserve Bank of Australia (RBA) rate cuts. The rally occurred despite consensus earnings estimates falling 2.9% YoY, lifting the ASX 200 forward PE ratio to 18.2x; a level only exceeded briefly in the equity bubble of 1999-2000.
Looking into 2020, we introduce five investment themes. |
| Looking back to a year ago, we had success with our four global themes: a US soft landing over a hard landing, an inflection point in central bank policy, trade and political uncertainty to moderate, and valuation extremes (then relatively cheap) to moderate. Looking in to 2020, we introduce five global themes.
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Australia’s Reserve Bank continues to deploy a pre-emptive policy strategy, easing policy when expecting below-trend growth and/or below-target inflation. In a speech last week, RBA Governor Philip Lowe indicated that official rates, already cut from a record low 1.5% to 0.75%, could be lowered to a mere 0.25%; though he set a higher bar on adoption of quantitative easing.
The ASX 200 remains robust, trading just below its record high and on an unusually high forward PE of ~16.5x, ~14% above average. But the earnings picture looks very different, with the trends of the FY19 reporting season –where earnings fell ~2% YoY – appearing to continue into the AGM season.
Asset Allocator
Global equity markets have rebounded sharply in 2019, retracing 4Q18’s correction. The US Federal Reserve has driven the rebound, moving to an extended rate pause. Signs of a trough in China and, until this week, easing trade uncertainty have added to the rebound. Bonds have continued to rally, oil has rebounded sharply, and the Australian dollar has moved sideways. In this note, we update our Tactical-Dynamic Asset Allocation views.