Crispin Murray: what’s influencing Aussie equities this week

Pendal's Head of Equities, Crispin Murray


Here are the key factors influencing Australian equities this week, according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.

BOND and equity markets remain in something of a holding pattern. The S&P/ASX 300 gained +1.8% last week despite poor news on the COVID front including tighter restrictions and evidence of a slowing economic recovery.

The focus is now on key developments including:

    • Imminent fiscal policy announcements in the US and Australia
    • Medical strain resulting from the US caseload
    • Victoria’s restriction level and NSW’s ability to contain the outbreak
    • Upcoming earnings seasons in Australia and the US

Equities and bond yields have been relatively flat for a while and it feels like the above factors could drive volatility at some point in next 4-6 weeks. However it’s very hard to call how that plays out.

Most surveys suggest investors are bearish and expect the next move to be down. This already depressed sentiment could support a break higher if upcoming fiscal packages or management of the second wave of infections is better-than-expected. Higher infection rates make it easy to be bearish – but we caution against the view that a drawdown is inevitable.

The Australian outlook

There are three key issues at play:

    1. Will Victoria implement greater restrictions? The estimated economic effect of the current lockdowns is 0.5% to 1% for Australian GDP. This could more than double if Victoria moves to level 4 restrictions, halting all retail and construction activity. There is a lot of pressure to avoid an extension of restrictions, but ultimately the case load will dictate this.
    2. To what extent will an increase in NSW cases lead to more restrictions? Any economic impact would be 50% greater than Victoria.
    3. How would a renewal of NSW restrictions impact fiscal policy? The Victorian situation has increased expectations about the size of a fiscal package due to be announced this week. There is talk of an additional stimulus worth 1% of GDP. This would offset much of the concern over a “fiscal cliff” and highlights the fact that policy makers continue to underwrite the economy and prop up markets.

The US outlook

Hospitalisations are rising dramatically in the US, closing on the previous peak and set to go well past it. This has not yet converted to a material increase in mortality, given a wider spread of cases and better understanding of treatment. Pressure on hospital system is building and risk remains — but health infrastructure is coping so far.

Rising US cases have triggered a behavioural response which should help. Some 77% of American live in areas now requiring masks. Mobility data is signalling that less interaction is occurring, albeit without too severe a retracement in activity.

The most effective models suggest this US cycle in cases should peak in early August at the current rate. If this ends up breaking higher, a more restrictive economic environment is likely to occur.

The vaccine outlook

The market continues to react positively to any positive news flow on vaccines. This triggers sharp rotation away from tech back towards value and cyclicals, which highlights the challenge in constructing portfolios in this environment.

Overall there remains a reasonable degree of confidence on the potential for a vaccine around year-end. Still, we are mindful of a set of subsequent issues, such as how effectively can it be produced and distributed, frequency of dose, people’s willingness to take it and the potential for new variants of the virus to require new vaccines.

Economic outlook

The debate over suppression versus elimination continues to rage. There is a growing push-back against harder lockdowns given the degree of economic impact.

As this plays out, we are mindful that higher case numbers can impact confidence even if governments avoid further restrictions. Surveys suggest Americans have lost confidence in dining out and public entertainment in recent weeks. This is reflected in broader indicators of consumer sentiment, which were not so constructive in recent weeks.

The slowing pace of recovery is likely to influence the next round of US fiscal stimulus, set to be announced soon. Markets are suggesting an expectation that the government will continue underwriting the economy.

Elsewhere, Chinese data remains supportive, while there are positive economic signs emerging in Europe.


Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and a strong track record leading Australian and European equities funds. He manages a number of our flagship funds along with one of the largest equities teams in Australia.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

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