Crispin Murray’s weekly Australian equities outlook (Jun 22)
Here’s the latest outlook for Australian equities from Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.
CONCERNS about a material second wave of COVID-19 infections have increased over the past week. This reflects a rise in cases in some parts of the US and other countries.
Here in Australia the spike in Victorian cases needs to be watched. Although small in number it may challenge the theory of a faster re-opening here.
The market rose +1.6% last week despite these issues emerging. This was driven by continued constructive economic data and optimism on further policy support. There was some rotation back to growth — the market sees value stocks more at risk in a potential second wave.
Concerns of a second wave are focused mainly on the US. However there are also clusters in Beijing, Germany, and an acceleration of cases in Latin America and India along with an increase in Victorian cases.
The issue from the market’s perspective is the degree to which this will impede the recovery. We think it unlikely the US will return to a broad lockdown, but targeted restrictions will limit some activity. The larger risk is the possible negative effect on consumer and business confidence.
This is a critical test of the US’s ability to absorb periodic increases in infections. If it can be managed, this may begin to build further confidence.
The headline numbers from the US are not encouraging. New daily cases have almost returned to where they were at the previous peak. The concern is this may lead to more hospitalisations, more stress on ICU units and more deaths.
Increases in US cases are concentrated in certain States. For example, Texas has seen cases double in the last few days while Florida is experiencing new daily cases at double the rate of its peak. Declines continue in north-eastern States that were hit hard earlier.
At this point hospitalisations are not picking up on a nationwide basis. The increases in Texas and Florida are not at concerning levels.
Since the previous peak a number of medical developments have emerged — notably awareness of the importance of anti-coagulants and steroids which can help reduce the severity of cases. ICU capacity has also increased.
The key issue to watch this week is whether the combination of much higher testing, physical distancing and better care prevents a significant escalation in severity.
While the uptick in Victorian cases is relatively small in number, it may be highly significant for the market. The consensus view is that disease has been successfully suppressed in Australia, which has led to a more optimistic view on the Australian economy relative to other countries.
If people start to expect restrictions around the country will remain in place longer than first thought, it will have a meaningful impact on market optimism and positioning within it.
Economic data remains constructive and is doing enough to offset burgeoning concerns over a second wave at this point.
Indicators out of the US remain strong. This partly reflects the fact that the north-eastern States so far avoiding a second wave make up a larger part of the economy than those facing the need for potential new restrictions.
Last week’s US retail sales data were better than expected. The Citi economic surprise index – which tracks the outcome of various data points versus expectations — is at its highest level in 18 years.
In Australia employment data was also better than expected. Monthly hours worked fell -10% from March, versus the -15% to -20% that the market had predicted.
Valuation versus liquidity
Liquidity is helping prop up the market despite more negative news – and is trumping concerns about near-term valuations.
The Fed and other central banks have pumped money into the system, most of which has found its way into cash and bonds.
This is reflected in the surge in FUM in retail money market funds. There has also been record issuance of investment-grade and high-yield bonds.
The overall market position has become more a neutral than a supporting factor. But it is far from a headwind. The liquidity program has allowed access to capital so companies can sort out their balance sheets and become more resilient.
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.
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