Weekly Market Update – 25 May 2020

We have begun to refer to the current pocket in markets as something like a ‘twilight’ period.  There are several reasons. 

Listen to the recording below:

Firstly, the run of March, April and May economic data has been so bad that it can only improve as economies slowly re-open. 

Secondly, the added support to consumption offered by government benefits such as Jobkeeper has provided much-needed ballast to a struggling economy and ensured that the economic deterioration wasn’t even worse. 

Finally, having seen the positive impact of social distancing, infection ‘curves’ have indeed been flattening in major developed countries such as Australia and in large parts of Europe and the United States. 

In a relative sense, the needle has shifted to a positive one, albeit like the sword of Damocles, the threat of a re-escalation in infection rates is looming, particularly in certain parts of the United States. 

Equally the true economic pain from shelter-in-place orders has been anaesthetised and it wont be until the end of support programs like Australia’s Jobkeeper (end September) or the Paycheck Protection Program (end July) equivalent in the United States ends that the full toll is revealed. 

Hence, investment markets sit in an eerie twilight, hopeful but with significant hurdles ahead. 

For those of you interested to track the progressive re-opening of cities, I would direct you to the following websites:

Observations for the past week

Construction activity set to soften considerably

  • We have flagged our concerns on domestic construction activity for some time, noting the combined impact of job losses and limitations on net migration levels as a major factor likely to see domestic residential construction start to slow considerably
  • Major building group Fletcher Building (FBU) last week guided to a -15% annualised fall in Australian residential building approvals by the end of the June financial year, a similar -15% fall in commercial activity and a -10% fall in infrastructure activity
  • It’s quite likely that at annualised rate, these figures could worsen as the calendar year drags on
  • With the construction sector employing roughly 10% of the Australian work force, the fall in order backlogs is a major threat jobs and economic activity in the near term, which when added to the job losses experienced across retail, food service and tourism sectors (themselves contributing almost 20% of the workforce) is a very dark cloud across the domestic economy, particularly when Jobkeeper supplements end in September
  • The chart below shows the monthly residential building approvals for private houses (in red) and the index on new housing orders from the Australian Industry Group (in white) and doesn’t paint a pretty picture 

Search for Yield amongst the ASX200

The chart below shows the forward forecast dividend yield for the ASX200 and how it compares to history 

  • As can be seen, the dividend yield forecast on the ASX200 has collapsed to its lowest level in decades as companies prioritise balance sheet security over returns to shareholders 
  • We think its unlikely Australian banks pay second half dividends as 2020 draws on and the impact of job losses mount on their lending books, however we do expect this capital retention will allow banks to resume payments in 2021 at a payout ratio nearer to 50% 
  • We do however feel very confident on the dividend payment abilities of recent portfolio additions such as Coles (4%+), Spark (6.5%), Invocare (4%+) and from dividend stalwarts such as Telstra (5%+), IOOF (6%+), Pendal (6%) and AMCOR (5%)
  • Beyond the Australian equity piece, we do believe listed debt vehicles such as the Qualitas Real Income (QRI) fund and each of the Metrics Master Income (MXT) and Metrics Opportunity Trust (MOT) offer impressive relative income at current discounts to net asset values 

Looking ahead

Monday 25th – Friday 29th May 2020

  • Monday: US MEMORIAL DAY HOLIDAY 
  • Tuesday: AU Weekly ANZ Consumer Confidence, US Chicago Fed National Activity Index (APR), US Consumer Confidence (MAY), US Dallas Fed Manufacturing Index (MAY) 
  • Wednesday: N/A
  • Thursday: AU Private Sector Capex (Q1), US Richmond Fed Manufacturing Index (MAY), US Beige Book report, US GDP (Q1), US Weekly Jobless Claims & Weekly Consumer Confidence 
  • Friday: AU Private Sector Credit (APR), US Chicago PMI (MAY) 

A very quiet week with US public holiday Monday restricting activity. 

Friday 22nd May, 5pm values

 IndexChange%
All Ordinaries 5608+116+2.0%
S&P / ASX 2005497+92+1.6%
Property Trust Index1174+49+4.5%
Utilities Index7474-179-2.4%
Financials Index4131-27-0.7%
Materials Index12772+735+6.1%

Friday 22nd May, closing values

 IndexChange%
U.S. S&P 5002855-8-0.3%
London’s FTSE5993+193+3.3%
Japan’s Nikkei20388+351+1.7%
Hang Seng22930-867-3.7%
China’s Shanghai2814

Key dividends

Monday 25th – Friday 29th May 2020

  • Monday Div Ex-Date – Elders (ELD) 
  • Tuesday: N/A 
  • Wednesday: Div Ex-Date – AMCOR (AMC)
  • Thursday: N/A
  • Friday: Div Ex-Date – NABPB 

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

The information in this recording and article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this recording and article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this recording and article. Information in this recording and article is current at the date of this recording and article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

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