What started as a positive month for markets and people around the world, ended up where it all began; with a substantial spike in COVID-19 cases and looming extension of stay-at-home restrictions. In Victoria, this is already the case with a ‘State of Disaster’ declared and sweeping curfews employed, ultimately putting great pressure on the entire country’s recovery. Similarly, the south of the US, particularly Florida and California have seen spikes of their own, along with France, Spain and England, suggesting there may be sometime before we are anywhere near through this. Despite growing concerns, markets have reacted passively, delivering a fourth straight month of positive returns, the ASX 200 up 0.51% and the tech-driven S&P 500 up 5.51%. Markets remain supported by sweeping monetary and fiscal policy, but without another round being announced in the coming weeks, markets may turn once again.
July saw the release of June quarter GDP growth rates and not unexpectedly, the results were grim. Records were broken across the board, the US shrinking at an annual pace of 32.9%, France -13.8%, Germany -10.1% and Australian expected to contract by at least 8.0%. On the positive side, the authoritarian regime is China is showing its powerful benefits, effectively cutting off the virus and reporting 11.5% growth in the June quarter. With Chinese exports from Australia growing 8% in May and steel production catching up to pre-crisis highs, is it possible China can save us again? Investors in BHP Group Ltd (ASX:BHP) and Fortescue Mining Group Ltd (ASX:FMG) definitely think so with the latter hitting all-time highs and increasing its dividend during the month.
There is, however, a great deal of change ahead. The rhetoric against Chinese businesses following years of apparent technology theft, is forcing a reshaping of the global supply chain at a time of great uncertainty. Huawei and more recently social media platform, Tik Tok, have been caught in the centre of this particularly following the ramping up of administrative pressure in China. In fact the Japanese Government is now supporting businesses to the tune of $500 million in their efforts to re-shore their operations; expect periphery Asian nations like Vietnam to benefit.
The apparent existential war on superannuation stepped up another gear during the month, with well-paid industry super board executives chiding the Government’s decision to allow members access to their own money. Industry super are highlighting the apparent risk of losing compounding returns for those who access their super now and suggesting the Super Guarantee rate should be increased to 12% to offset the now $42 billion reduction from the sector. Given some 11% of mortgages have been deferred and unemployment now sits at close to 11% in real terms, the Government seems to be allowing the population to share the load rather than running even larger deficits. Given many of those withdrawing cash may have another 30 years to wait before getting access to their super, there is every chance it may be re-nationalized by then. It seems the tightknit cohort are a little concerned about their gravy train slowing.
Outside of technology stocks, gold bullion was the standout investment of the month. The precious metal has passed all-time highs in US dollars, closing in on USD$2,000 per ounce, with the AUD still hovering around $2,700. It seems the asset class is finally moving into the mainstream as interest rates fall to zero and concerns about market valuations continue to increase. Whilst the asset is becoming more common in private portfolios, it remains non-existent in most industry and pension funds, which means it may have some more room to run. Gold remains misunderstood by traditional investors and advisers, who remain unable to price it without ‘cash flow’ or an intrinsic value or assuming it only protects against inflation. Interestingly, it has protected portfolios better in deflationary environments with the worst-case scenario being solid and consistent economic growth; something we are unlikely to see soon.
The active vs. passive debate was activated once again, albeit with outdated figures, with Standard & Poor’s announcing 80% of Australian equity funds underperformed in the five years to 31 December. As we have covered in the past, the assessment includes some 600 funds many of which would not be considered of investment quality. For those who follow our model portfolio, the 2020 volatility has, in our view, truly reflected the benefit of active managers. Six of the eight core managers we recommend, but particularly the global equity funds, outperformed their benchmark to 30 June, some by as much as 15-20% in absolute terms.
With the new financial year starting on positive footing, it’s worth taking stock of what has just passed. If there is one lesson to take away from the COVID-19 crisis and incredible recovery, it’s that you can’t pick the top or bottom of the market and trying to can be incredibly costly. For instance, those investors who capitulated in March and missed just the five best trading days since, would be close to 40% behind the benchmark. Importantly, you don’t need to time the market to boost your returns, you simply need capital available to deploy when everyone else is selling.
August stands out as an incredibly important month for investors and Australian’s in general, with the way Victorian’s deal with the escalating virus cases key to the medium-term future of the economy. The month will also see the all—important full year reporting season for most ASX-listed companies, with a particular focus on the dividends previously deferred by a swatch of banks, insurance, retail and infrastructure companies. With end of financial year reporting being delivered the time may have finally come for investors to focus on total returns rather than income alone.