UWJ Monthly Edition – June 2020

What a month, markets rallying again capping off the strongest quarter for the ASX in over 20 years. The technology focused Nasdaq reached all-time highs and the S&P500 had the best quarter since 1938. The month continued the ‘changing of the guard’ trend, with the old-fashioned, capital intensive sectors, like property, energy and utilities, underperforming as e-commerce, consumer and IT focused companies came to the fore. The market has come a long way since the depths of the COVID-19 crisis, yet with escalating COVID-19 cases in the US and Victoria, there is a growing feeling that valuations may be overdone.

There are two key takeaways from the June quarter; relying solely on the benchmark is high risk and timing the market is a dangerous game. Bloomberg reported this month that those who tried to time the market and sell out in March, would have suffered 30% falls if they missed just the five most positive days since. It’s clear that the key to successful investing is to establish and maintain an appropriate asset allocation, but also have the flexibility to deploy capital when markets fall and not capitulate. There are a number of papers written about why un-advised investors underperform the very funds they invest in, as they tend to sell when markets are down and buy when markets are high.  

The worst kept secret in financial markets appears to have been exposed this month with Mayfair Platinum and IPO Wealth’s flagship fund facing the Supreme Court and entering administration after it failed to make a loan repayment. Management continue to blame ASIC’s targeting of their strategy and stress that it isn’t a ‘Ponzi’ scheme; yet there are reports that new investors funds were being used to pay out existing investors and a series of unaccounted for transfers within the complex structure. We also saw the collapse and potential resurgence of Virgin Australia in a few short months, with unsecured bond holders, many of which were retail investors with bond specialist FIIG, likely to see nothing on their returns. Despite increasing regulation these and many other investments seem to be slip through to the detriment of un-advised investors, once again reiterating the value of financial advisers in their ability to be a ‘bullshit’ filter.

June saw the release of a combination of outdated GDP results for the March quarter, and the all-important PMI’s for most major economies. On the growth front, Australia lead the developed world shrinking just 0.3% in the March quarter, with exports supported by huge growth in iron ore and coal sent to China. The Chinese economy contracted 9.8% with the Communist Government conceding their growth target of 6.5% was no longer relevant. The US shrank 5%, France and Italy 9.2% and the UK 2.2%, with the latter’s April figures showing a massive contraction of 20%. On the positive side On the positive side PMI’s which are leading indicators of improving economic performance were universally improved; Australia almost doubling to 52.7, China back at recent highs of 55.7, Japan improving from 27.8 to 40.8 and the US 46.8 from 37. Anything over 50 signals a growing services and manufacturing sector.

Looking forward, the IMF continues to adjust their expectations and forecasts for 2020, predicting a 4.5% contraction in Australia, 8% in the US and 10% in the UK. If we have learned anything from this incredible period in the history financial markets, it’s that economic forecasts should never be relied upon. There is growing pressure on the sector in general to include more realistic and dynamic assumptions in light of glaring misses. One example was the US employment figures in May, where most predictions were for 7.5 million more job losses, but the actual result was 2.5 million new jobs being created.

Continuing on the topic of unemployment, it’s clear that global government policies, but particularly those in Australia, the UK and Europe, are having a huge impact on job losses. Australia’s unemployment rate of just 7.1% is a testament to the Job Keeper package as is the UK, which is paying around 80% of workers’ wages, with unemployment still just 3.9%. What happens when the tap is turned off by Government’s must be the greatest concerns to all Australian’s today, with many companies already cutting thousands of staff and many employers keeping employees solely for the government payments. This will be a real test of political leadership with politicians required to forget about the debt and focus on the welfare of their people.

With deficits in mind, the new economic concept of Modern Monetary Theory has been a major talking point with Alan Kohler the latest proponent of its potential benefits. He was immediately attacked by many other finance journalists, who seem to have limited knowledge of the underlying workings of the economy or the monetary system in general. The concept that money printing creates inflation has cleared been debunked after seeing the Japanese, European’s and US extend monetary policy with no such results. Nathan Tankus, an unknown US student, has grown a substantial following via his simple explanation of this and many other concepts. If there is only one takeaway from the discussion it is that austerity economics simply does not work and the repayment of Government debt should not be a priority, particularly in the current ‘wartime’ footing. With interest rates so low, debt can be utilized and doesn’t require higher tax rates to repay it more quickly.   

How did your  portfolio perform this year? If you are sitting on a large negative return for the financial year, then you clearly didn’t have enough exposure to the companies of the future or were among the many relying on dividends for the bulk of their returns. With the likes of ANZ and Westpac deferring but really cutting dividends, they lead the worst performance for the financial year, down 34% and 26% respectively. This compares to the ‘overvalued’ CSL which delivered a 33% return in the worst market in history. The dispersion occurring in share prices has been substantial with a laundry list of technology companies leading the way: Afterpay (ASX:APT) +143%, Fisher and Paykel (ASX:FPH) +123%, Megaport (ASX:MP1) +85%, and gold miner Silverlake (ASX:SLR) +69% up strongly.  Global performances were even more stark, Tesla (NYSE:TSLA) leading the way up 106%, Apple, 43%, Microsoft 29% and Nvidia 44% as the world goes digital at a breakneck pace. Unfortunately, for those with a preference for domestic shares or who are not comfortable with investing in managed funds, these incredible returns would have been sorely missed.

What to expect from here? We expect a great deal of volatility ahead and huge dispersion in those companies that are able to weather both the second wave of infections and the huge changes to the economy as we know it. We expect a lot more retail pain, substantial write-downs across the oil and gas sector and the potential for devaluations in both commercial property and residential investment property values. Many of these trends are already underway, with tenants exiting retail leases, spiking vacancies in offices and apartments, and a substantial rise in off the plan purchase cancellations.