Weekly Market Update – 12 October 2020

Well it was certainly a Federal Budget that made you take notice.

We knew the Government was going to spend up big because it was largely pre-announced and because our economy needs a big cash injection to stimulate growth by way of job creation and spending.

But the sheer scale and size of this Budget really does make you stop and think that the current Government is committed to growth.

The firepower the Government has launched at the economy is a big positive and whilst net debt is forecasted to peak at $966b in 2024 and will take decades to pay back, this level of spending is absolutely necessary to reignite our economy in the midst of our greatest challenge since the Great Depression.

Sure, there are always winners and losers to come out of every budget with childcare and retail missing out on additional funding this year and those on JobSeeker aged over 35 likely to face greater competition in re-entering the workplace.

But there are plenty of winners.

Income tax relief for individuals, cash payments to seniors, disability support recipients and carers are all designed to promote spending whilst greater deductions for businesses on depreciable assets and the ability to offset current year losses against previous profits are aimed at softening the blow caused by coronavirus.

Treasurer Frydenberg began the Budget on Tuesday night by stating “this budget is all about jobs” and the $4b JobMaker Hiring Credit incentivising businesses to take on additional employees aged between 16-35 and boosting the Apprenticeship Wage subsidy by $1.2b reinforces this.

It is a big deficit, but we think there is cause to be a bit more optimistic for the economy in FY21 and beyond.

RBA

The RBA sat only hours before the budget was handed down and took what we believed was the prudent approach.

Why cut the official rate only hours before seeing what level of stimulus the government was likely provide?

Markets continue to rate the chance of a rate cut better than 50-50 before the end of 2021 and you only have to look at the current yield on the 3-year Commonwealth Government bond to get a sense for what markets are anticipating.

The current yield here is 0.14% so the bond market is foretelling wider markets that we are likely to see a rate reduction when the RBA next sit on Melbourne Cup day.

A growing number of economists are predicting the RBA will consider buying bonds with longer maturities (5-10 year bonds) to signal a long term commitment to lower rates.

With the currency currently trading above 72c any such move may provide some support to weakening the AUD back to the 70c level. The RBA have been very vocal about lowering the AUD in order to make our exports more attractive to international buyers, so given the sharp rally from March onwards this remains a key objective.

Global equities

Global equity markets largely shrugged off news surrounding the President’s COVID-19 infection with markets rallying close to +2% last Monday.

However, as we have stated in past months volatility will continue to impact market movements running into the US election.

Evidence of this was clear on Tuesday when Trump announced that further stimulus talks would be halted until after the election given the inability between the Democrats and Republicans to come to terms. Whether or not stimulus talks are indeed halted or not, the market reacted swiftly and sold off -2% peak-to-trough.

Ultimately, the US equity market ended up rallying close to +4% for the week to post its best weekly gains since July.

Once again, the NASDAQ drove the market higher with tech stocks rallying +4.5% as EBay (EBAY) and Netflix (NFLX) led the way+7%.Both stocks are due to provide third quarter financial updates in the next fortnight.

Elsewhere, the UK gained +2% to close the week at a three-week high, as a new jobs support plan and progress in Brexit talks outweighed the surge in COVID-19 infections.

Meanwhile China added +1.7% on Friday with the market having been shut for most of the week due to Golden Week. Interestingly Golden Week showed the strongest signs yet that China’s tourism sector is recovering from the global pandemic with 637 million tourists travelling within China over the week.

ASX climbs for 5 consecutive days

The ASX had its best week since mid-April, rising more than +5% and posted five straight days of gains for the first time since June.

Gains were recorded across all major sectors with energy +9%, financials +8% and IT +8% faring best. Oil stocks were well bid as a Norwegian oil strike that threatens to wipe out nearly a quarter of the country’s petroleum output. The downward pressure on supply saw Brent oil and WTI climb +9% during the week.

Locally, the best performing stock was engineering and industrials group CIMIC (CIM) which rose +20% after a third quarter update revealed strong Q3 revenue growth and a positive market outlook. Demand for its services looks likely to remain strong following the Federal Budget announcing heavy investment in infrastructure.

Gold miners Northern Star Resources (NST) and Saracen Mineral Holdings (SAR) both climbed +15% on the back of news the two companies would enter into a $16b merger. The deal is expected to create $2b in synergies and create a top 10 global gold mining powerhouse.

Time to reflect

Over the past five years, we have tactically moved to increase our exposure to international equities which has served portfolios well.

One only has to look at the outperformance of US equites relative to Australian equities in this time period to see how well this has worked.

We are extremely pleased with how our two most recent international fund manager recommendations have performed throughout the 2020 period.

The T.Rowe Price Global Equity Fund has returned a staggering +19.6% outperforming its benchmark return of 0.04% and the Trinetra Emerging Markets Growth Trust has delivered a more modest but still impressive outperformance of 4%.

We added both funds to the International Equity SMA in December last year.

In the fixed income space listed investment trusts (LITs) Metrics (MXT) which provides direct lending and private debt and Qualitas (QRI) which provides direct exposure to the commercial real estate market continue to distribute attractive monthly income.

MXT has returned 5.1% income to investors over the last 12 months based on its issue price of $2.00 and likewise QRI has delivered 6% income on its $1.60 issue price.

Whilst both LITs were met with heavy selling in March and at their lows traded 35% below their respective Net Tangible Asset (NTA) value, much of this has since been recovered. For a defensive component of portfolios, we believe the income from MXT and QRI remains attractive.

Disappointingly Australian equities have lagged. Much of this underperformance came from being overweight cyclicals which were the first stocks sold in Q1 and from being overweight diversified financials.

The impact of the pandemic on markets has reinforced the idea that high quality, blue chip stocks survive market down turns better than most due to their robust balance sheets and ability to generate ongoing cash flows.

We used the market correction back in April to boost the quality of portfolios by adding Coles (COL) and Spark Infrastructure (SKI) and we continue to think this quality approach will deliver the best risk-adjusted returns moving forward. As such we are revisiting a list of top 20 stocks which we believe are likely to emerge from the pandemic in better shape.

Potential considerations include BHP, CBA, CSL, WES and WOW.

Looking ahead

Monday 12th October – Friday 16th October

  • Monday: CN M2 Money Supply (SEP)
  • Tuesday: CN Trade Balance (SEP), UK Unemployment Rate (AUG), US Core Inflation Rate (SEP), NFIB Business Optimism Index (SEP)
  • Wednesday: AU Westpac Consumer Confidence (OCT), New Home Sales (SEP), US Core PPI (SEP)
  • Thursday: AU Unemployment Rate (SEP), CN Inflation Rate (SEP), US Weekly Jobless Claims (OCT)
  • Friday: US Retail Sales (SEP)

Friday 9th October, 5pm values

 IndexChange%
All Ordinaries 6313+330+5.5%
S&P / ASX 2006102+310+5.4%
Property Trust Index1346+33+2.5%
Utilities Index7032+139+2.0%
Financials Index4777+335+7.5%
Materials Index14218+708+5.2%

Friday 9th October, closing values

 IndexChange%
U.S. S&P 5003477+129+3.9%
London’s FTSE6017+115+1.9%
Japan’s Nikkei23620+5902.6%
Hang Seng24119+6602.8%
China’s Shanghai3272+54+1.7%

Key dividends

Monday 12th October – Friday 16th October

  • Monday: Div Pay-Date – Chorus Limited (CNU), Orora Limited (ORA)
  • Tuesday: Div Pay-Date – Coca-Cola Amatil (CCL), Seven Group Holdings (SVW)
  • Wednesday: Div Pay-Date – BlueScope Steel Limited (BSL), FlexiGroup Limited (FXL), News Corp (NWS)
  • Thursday: Div Pay-Date – Healius (HLS), Qualitas Real Estate Income Fund (QRI)
  • Friday: Div Ex-Date – Newcrest Mining Limited (NCM), Vanguard Australian Fixed Interest (VAF), Vanguard Australian Shares Index (VAS)

Contact

Mark Johnson – Chairman of Investment Committee(03) 8825 4738
Guy Silbert – Investment Manager(03) 8825 4750
Jordan Lisle – Dealer & Research Assistant(03) 8825 4749

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

Mark JohnsonT: (03) 8825 4738Cameron MorcherT: (03) 8825 4737
Livio Caiolfa T: (03) 8825 4748Michelle BromleyT: (03) 8825 4751
Marcus AingerT: (02) 9134 6292Nicole LewisT: (03) 8825 4734
Dylan CresswellT: (03) 8825 4707Garry FrizzoT: (07) 4019 2410
Michael CooperT: (07) 3010 8597Nicholas MillerT: (03) 8825 4722
Jarrod RoddaT: (03) 8825 4729

The information in this 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 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 article. Information in this article is current at the date of this 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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