Well, there you have it.
The ASX200 closed out the week above 7000 points for the first time since the onset of the global pandemic last March.
Quite remarkable.
Much has been talked about the unprecedented level of fiscal stimulus governments around the world have implemented in order to combat the negative impacts of COVID-19 and it is hard to argue with its effectiveness.
The size of these stimulus packages combined with record low interest rates has seen stock markets recover to eclipse their previous COVID-19 highs or recover to levels that are only marginally away from previous highs.
Of course, stock markets are a reflection of investor optimism both at a local and global thematic, so it is hard to deny given dramatic improvements in employment data, GDP and consumer confidence that this fiscal stimulus was absolutely necessary.
There is a growing chorus of pundits who are calling for a surprise ‘inflationary shock’ because the level of stimulus provided has been so enormous, however, we have confidence the Federal Reserve and the RBA are unlikely to adjust interest rates based on current data.
Both banks have publicly stated that inflation and employment data need to be sustainably within their desired targets before they would consider hiking rates.
Federal Reserve Chairman Jerome Powell recently stated that “the recovery has progressed more quickly than generally expected and looks to be strengthening. But the recovery is far from complete, so, at the Fed, we will continue to provide the economy the support that it needs for as long as it takes.”
Our optimistic outlook for equities remains very much intact given the backdrop for equities remains strong, however, we remain cognisant of the strong run equity markets have had.
With that being said the ASX is certainly starting to look a little more fully priced at these levels given we are now less than 2% from the previous peak pre-COVID.
As an investment committee we continue to track how the ASX is performing relative to earnings per share (EPS) and dividend per share (DPS) growth.
We continue to expect 15-20% EPS growth in FY21 and 20% for calendar 2021 so whilst the share market is looking a little more fully priced at these levels, we believe conditions remain attractive.
We continue to prefer quality and value ahead of growth stocks and the portfolios currently reflect this sentiment along with a bias to businesses with strong balance sheets.
If the economy continues to grow as expected bond yields will widen further towards 2% and we believe this will suit value-style investments.
Waypoint (WPR), Brambles (BXB) and Woolworths (WOW) remain our preferred exposures in the equity space at current levels.
We believe WPR’s 6.5% forward yield is highly attractive from an income perspective whilst BXB and WOW are well positioned to benefit from a continued reopening of the domestic and global economy.
We also anticipate strong dividend uplift from ANZ, NAB and WBC when all three banks report next month.
Business conditions rose to a record high in March as forward orders climbed +7 points to record levels which points to ongoing strength in activity with the pipeline of work rising further.
Alongside the strength in activity, capacity utilisation rose further in the month and is now well above average. Encouragingly, capacity utilisation is at or above pre-COVID levels in all industries except for recreation & personal services – which unsurprisingly is still impacted by pandemic related restrictions.
Business conditions rose +8 points to a record high 25 index points in March and whilst business confidence fell slightly (-3 index points) it remains well above average.
Capacity utilisation which reflects the level of activity rose from 81.8% to 82.3%. The high level of capacity utilisation suggests these gains are more than just a rebound from earlier disruptions and there is likely a solid underlying momentum in activity.
This Wednesday Westpac will publish its March Leading Index report which will provide further insight into the underlying strength of the Australian economy.
If business conditions are good, it stands to reason businesses are increasingly hiring more staff and unemployment is falling.
That is exactly what happened when the unemployment data for March was released last week which showed the unemployment rate fell to 5.6% from 5.8% the month prior with an additional 70,000 jobs created.
For context the unemployment rate was 5.2% in March last year prior to the onset of COVID-19 which ended up seeing the unemployment rate peak at 7.5% in July last year.
So, the unemployment rate now is only 0.4% higher than it was prior to the pandemic. Once again, this is quite remarkable and undeniably positive for the future direction of the economy.
The participation rate increased to 66.3% from 66.1% the prior month which indicates more people are either currently employed or actively seeking work which is another positive.
The two negatives from the data were a fall in full time employment (-20k) compared to a rise in part-time employment (+92k) which points to a potential rise in the underemployment rate in the coming months.
The second notable factor is that the March employment statistics won’t capture the end of JobKeeper program which ended on March 28. We would expect the unemployment rate to rise in the coming months as a result of this.
The Australian share market outperformed the global benchmark last week rallying +1% compared to the MSCI World Index which was broadly flat in AUD terms.
A stronger AUD (+1.3%) was partly to blame for the relatively muted performance of the global benchmark.
US equity markets outperformed with the S&P 500 delivering +1.4% gains whilst the NASDAQ and Dow Jones both added in excess of +1% on the back of stronger than expected CPI data which rose +0.6% month on month and +2.6% annualised.
Consumer prices in the US continue to receive a boost from recent stimulus cheques which have driven much of this economic recovery.
Locally, tech stocks drove the market higher rallying +4.3% ahead of healthcare and miners which climbed +1.9% and +1.5% respectively.
Traditional defensives such as utilities were the weakest sector in the market falling -2.5%.
At a stock level Zip Co (Z1P) was the best performing large cap stock rising +13% last week following the release of its Q3 update.
Z1P posted a +80% increase in quarterly revenues to $114m which was primarily a result of strong growth in transaction numbers which nearly doubled from the prior corresponding period and volume which climbed +114%.
Pendal Group (PDL) rallied close to +10% last week after the Group posted its latest funds under management (FUM) update which reported a +4.4% increase taking group FUM to $101.7b.
Recent strength in equity markets has also helped PDL increase total funds under management.
Best performing stocks in the PRIME Australian Equity Growth SMA were Ampol (ALD) which delivered a strong +5.4% share price gain following the release of its Q1 update.
ALD’s earnings grew across all three major segments with its Australian Fuels and Infrastructure recording EBIT of $59m whilst its Lytton refinery in Brisbane broke even which was a marked improvement on the same quarter in the prior corresponding period when it reported an $18m loss.
BHP Group (BHP) was another pleasing performer rising +2% on the back of a +2.6% rise in the price of iron ore which continues to trade at decade highs of US$175/tonne.
Monday 19th April 2021 – Friday 23rd April 2021
Index | Change | % | |
All Ordinaries | 7326 | +74 | +1.0% |
S&P / ASX 200 | 7064 | +69 | +1.0% |
Property Trust Index | 1485 | +18 | +1.2% |
Utilities Index | 6146 | -160 | -2.5% |
Financials Index | 6227 | +36 | +0.6% |
Materials Index | 16775 | +244 | +1.5% |
Index | Change | % | |
U.S. S&P 500 | 4185 | +56 | +1.4% |
London’s FTSE | 7020 | +104 | +1.5% |
Japan’s Nikkei | 29683 | -85 | -0.3% |
Hang Seng | 28970 | +271 | +0.9% |
China’s Shanghai | 3427 | -24 | -0.7% |
Monday 19th April 2021 – Friday 23rd April 2021
Mark Johnson – Chairman of Investment Committee | (03) 8825 4738 |
Guy Silbert – Investment Manager | (03) 8825 4750 |
Mark Johnson | T: (03) 8825 4738 | Cameron Morcher | T: (03) 8825 4737 |
Livio Caiolfa | T: (03) 8825 4748 | Michelle Bromley | T: (03) 8825 4751 |
Marcus Ainger | T: (02) 9134 6292 | Nicole Lewis | T: (03) 8825 4734 |
Dylan Cresswell | T: (03) 8825 4707 | Nicholas Miller | T: (03) 8825 4722 |
Jarrod Rodda | T: (03) 8825 4729 |
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