The S&P/ASX 200 Accumulation Index returned 2.6% during the month. Australian equities rallied with global equity markets in June. An easing of mobility restrictions saw major equity markets rally almost proportionately to each regions COVID-19 case control. US market sentiment was weighed down at the end of the month by the surge in new COVID-19 infections. In major global developed markets, the DJ Euro Stoxx 50 was up 6.5%, both Japan’s Nikkei 225 and the US S&P 500 were up 2.0% and the UK’s FTSE 100 was up 1.7%.
The Reserve Bank of Australia (RBA) reaffirmed its commitment to support the financial system through a historically low cash rate of 0.25%, yield curve control to keep 3 year bonds at 0.25% and scaling up of asset purchases as needed. These measures are intended to keep funding costs low and sustain credit availability.
Domestic economic data releases were weaker in June. The effects of COVID-19 continue to show through the data. Employment fell by 227,700 positions in May, larger than the expected 78,600. The unemployment rate in May continued its rise to 7.1%. Q1 GDP was negative at -0.3%. The NAB Survey of Business Conditions did rebound in May, however, remained deeply negative at -23.8 points, with business confidence similarly rebounding but remaining weak at -20.0. Retail sales through April were down 17.7%. National CoreLogic dwelling prices continued to fall in June, printing a decline of 0.4%.
Capital raising continued in June. Issues of note including SkyCity Entertainment, Super Retail Group, Alliance Aviation, Challenger, Kogan, Infratil and Qantas. Qantas also announced a workforce reduction by at least 6,000 roles which was co-incident with a recapitalization of competitor Virgin Australia.
Sector returns were mostly positive in June. The best performing sectors were information technology (6.0%), consumer discretionary (5.4%), consumer staples (5.1%). These were followed by financials (4.4%), healthcare (3.5%) and materials (2.3%) which also outperformed the broader market. Sectors that lagged included communications services (0.1%), utilities (-0.4%), industrials (-1.3%) and real estate (-1.7%). Energy (-2.0%) was the worst performing sector.
The information technology sector was the best performer for the second month in a row. Afterpay Touch (28.6%) was again the sector’s best performing stock, continuing to benefit from the increase in e-commerce due to enforced COVID-19 lockdowns. Xero (5.7%) also outperformed.
The consumer discretionary sector also outperformed. Sector heavyweight Wesfarmers (11.0%) and JB Hi-Fi (15.9%) outperformed, benefitting from strong sales as people continue to work from home in large numbers.
The consumer staples sector enjoyed a good month also on the back of stronger sales during the pandemic. Woolworths (5.5%) and Coles (11.8%) were both key drivers of sector performance.
The industrials sector underperformed in June. Brambles (-6.6%) was the main detractor from underperformance. Sydney Airport (-3.1%) and Qantas (-5.3%) detracted from performance as the pandemic continues to play havoc with the airline industry.
Real estate also underperformed during the month. Vicinity Centres (-11.2%) was the biggest detractor. Though the stock rallied following its AUD 1.4 billion capital raising, the sector lagged along with other cyclicals.
Energy was the worst performer in June despite a rise in oil prices. The sector appeared to fall victim to profit taking after relatively solid outperformance since April. Woodside Petroleum (-4.5%), Oil Search (-8.9%) and Whitehaven Coal (-21.0%) were the key detractors.
June saw a continuation of the TINA (There Is No Alternative) trade as markets responded to the unparalleled stimulus measures from governments and central banks across the globe, despite fears of a second wave of COVID-19 as infections spiked across a number of countries, particularly the US.
Recessionary conditions still loom large. The earnings downgrades and/or removal of previous guidance due to COVID-19 has continued. Given cash flow concerns, company boards have reduced or cancelled dividends for the foreseeable future and capital raisings have been on the rise as another source of funds to allow companies to weather the storm. Thankfully, unlike the GFC, most banks are well capitalised, have enough liquidity and are being supported by the government and regulatory bodies to allow them to be supportive to customers that are under stress.
While the rapidly developing situation and ensuing uncertainty makes forecasting more difficult, we continue to reassess our earnings estimates. This includes reviewing short-term earnings and implications for dividends and balance sheet risk, as well as long-term earnings, which has implications for valuations. As well as assessing the risks associated with stocks in the portfolio currently, we are also actively assessing opportunities thrown up by any aggressive and, in some instances, indiscriminate sell-offs. Ultimately the impact on long-term earnings estimates and valuations will be a function of the depth, duration and damage inflicted during this period of enforced subdued activity.
“How deep” and “how long” are the relevant questions being asked within Nikko AM, as the past few months have seen a dramatic turn in the global economy due to the spread of COVID-19.The unprecedented speed of this correction and changing economic landscape due to government intervention is making assessment of sustainable valuation difficult. However, this provides opportunities within different sectors and stocks as the sell-off has often been indiscriminate. The combination of extreme positioning and valuation differentials always provides strong forces when the market reverses. Like other large market corrections, it is always difficult to pick the bottom and thus rotating slowly into some of the beaten down value names funded by reducing and exiting the outperformers is an approach that we have found has worked well in these type of markets.