- Market performance across the asset classes improved considerably in April. The Australian fixed interest asset class was the only one to decline in the month after a torrid March.
- Global equity markets generally maintained a positive trend following Congress’ approval of the US rescue package on March 23rd.
- A strong rally in the AUD resulted in returns from currency hedged global equities being well above unhedged returns.
- The domestic equity market has responded positively to indications the impact of COVID-19 will pass earlier than expected.
Share markets rose strongly in April, building on a strong bounce at the end of March. However, despite this emphatic response to government and central bank support, day to day volatility is still elevated and hence the recovery can still be characterised as fragile. The technology heavy US markets were the strongest, with the NASDAQ index – dominated by technology companies and particularly by Microsoft, Facebook, Google, and Amazon – returning 15.4%. This was well ahead of the broader US S&P 500 Index return of 12.8%. Technology companies have been less affected, or even benefited from, the impact of COVID-19 on commerce. Although not as strong as the US market, other developed economy markets performed well with average increases of 5% across Europe and nearly 7% in Japan. Emerging markets also performed well, with China (up 6.0%), India (up 15.3%) and Korea (up 8.3%) all contributing positively.
The Australian market performed well, rising 8.8% overall. The Energy sector was clearly the strongest as oil prices stabilised, and quarterly production updates gave management the chance to report to shareholders on (largely) incident free trading and production activity. Information Technology was also up substantially with investors rewarding their resilient business models.
All sectors were positive, however the more stable Communication, Health Care, Financials, Utilities and Staples groups returned 2.4% to 5% – all well below the market average. Notably, the Property Trust sector also bounced back strongly, delivering 13.7% for the month as investors came to grips with the likely impact on property values and cashflows of lower levels of commercial and retail activity. However, such was the magnitude of the sell-off in property trusts in March that the sector still remains down 31% for the quarter.
A feature of recent weeks on the Australian market has been an increase in equity issuance, which is in contrast to a lengthy period prior to the Coronavirus crisis when buybacks helped shrink shares on issue. New share issues help strengthen the balance sheet position of companies, enabling them to navigate a period of falling revenue more successfully. These share issues can also provide an opportunity for investors, with the new capital often issued at a price below the prevailing market value. However, non-participation in new equity raises by investors will generally result in dilution of ownership and a smaller participation share in future profits. Of the major banks, NAB is so far the only bank to announce a new share issue, with Westpac and ANZ using dividend deferral to increase capital. We expect that ANZ and Westpac will make every effort to pay some form of dividend before the next result but APRA’s (the banking regulator) direction to conserve capital will take precedence until the outlook is clearer.
Fixed Interest & Currencies
Global and domestic bond markets were relatively flat last month. Interest rates on government bonds are essentially mandated to remain at low levels on short-term securities, while new issuance (supply) of government debt is suddenly now at record levels. When the supply of bonds increases there is less scope for bond prices to rise (and yields to fall). This is particularly relevant at the longer end of the yield curve, which is less subject to interest rate targeting by central banks. The 10-year Australian Government Bond yield finished April 0.10% higher at 0.87%, whereas the equivalent US yield fell by 0.06% to 0.64%.
As was the case with equity markets, improved sentiment supported the value of credit securities, which pared back some of the losses recorded in March. The market for corporate credit (company debt) securities continued to benefit from central bank support. The Australian Reserve Bank recently announced its willingness to broaden the range of security types it will consider eligible for purchase under its program to include securities issued by non-bank corporations with an investment grade credit rating.
The widening of the gap between longer term Australian and US interest rates may have been one factor supporting a rally in the AUD last month. A recovery in oil and other commodity prices, together with an improved growth outlook, may have also contributed. The bounce back in the AUD over April from US 61.8 cents to US 65.7 cents reversed all of the decline recorded in the month of March. The AUD was also 5% stronger against the Japanese Yen and 8% stronger against the Euro.
Outlook and Portfolio Positioning
The general improvement in sentiment over April was consistent with the evidence of a peaking in the infection rate of the Coronavirus around the globe, and a broader sense that the path to normality has commenced. Notwithstanding this improved sentiment, uncertainty and risks remain elevated and there will now be considerable focus on real economic data and company results to try and narrow down this range of unknown outcomes.
April’s recovery across equity markets has also removed much of the opportunity for “bargain” purchasing of stocks with the “overshooting” of share markets rectified to a level much more reasonable by the end of the month. At current valuations and risk levels, equity markets appear neither cheap nor overly expensive. Given Australia’s position characterised by strong trade accounts (in part due to China’s earlier normalisation) and a domestic economy less impacted than those in the Northern Hemisphere, the pendulum of relative attractiveness may have swung in favour of the local market over global opportunities. Notably, the Australian market has fallen by 7% more than the global average over the past quarter. The relative performance of the local market will be heavily impacted by the banks and whether recently announced loss provisions are sufficient. Price movements across residential property markets therefore take on a new importance for share market investors.
The relatively favourable position of the Australian economy may also result in recent support for the AUD being continued. Interest rate differentials are no longer a negative influence on the Australian exchange rate and the AUD may increasingly be seen as a safe haven for global investors looking to diversify away from the USD as the US election approaches. As such, some currency hedging of global equity portfolios should continue to be considered.
For fixed interest investors, the outlook remains challenged by the exceedingly low interest rates in place, which provide minimal compensation for what may lay ahead. Opportunities in credit markets have contracted as valuations have been restored; and medium term risks associated with an eventual withdrawal of support by central banks should be evaluated. A bias to cash and term deposits within the defensive range of assets may increasingly need to be considered.
The following indexes are used to report asset class performance: ASX S&P 200 Index, MSCI World Index ex Australia net AUD TR (composite of 50% hedged and 50% unhedged), FTSE EPRA/NAREIT Developed REITs Index Net TRI AUD Hedged, Bloomberg AusBond Composite 0 Yr Index, Barclays Global Aggregate ($A Hedged), Bloomberg AusBond Bank Bill Index, S&P ASX 300 A-REIT (Sector) TR Index AUD, S&P Global Infrastructure NR Index (AUD Hedged).
General Advice Disclaimer
This document is intended for the use of financial adviser clients of Accru Financial Planning Pty Ltd and their staff only. Any advice provided is of a general nature and does not take into account personal circumstances. Any decision to invest in products mentioned in this document should only be made after reviewing the relevant Product Disclosure Statements. Past performance is not a reliable indicator of future performance. No revenue has been received by Accru Financial Planning Pty Ltd as a result of the production of this document.