• Marcus Bogdan

Investor Newsletter - Quarterly Q3 FY2021

Equity markets made it to the end of the first quarter of 2021 demonstrating bulletproof resilience. The opening months of the year have not provided anything like the scale of the “once in a century” pandemic shock that global economies faced in the same period in 2020.


We have just passed the 1-year anniversary for the trough in global equity markets. The event-based pandemic led to one of the sharpest contractions and rebound in equity markets.


What is clear that the magnitude and breadth of the response by government and central banks combined “firepower” of fiscal and monetary policy measures successfully inoculated economies from the worst effects of the lockdowns. Combined with the successful discovery of a COVID-19 vaccine the result has been that consensus estimates for the global economy and earnings have consistently under-estimated the speed and magnitude of recovery.

In FY21 earnings and dividends collapsed by >20%, however, evidence of earnings and dividend recovery was remarkedly quick with the 1H21 results season being the strongest in terms of earnings revisions.


Bond yields have pushed higher as global economies continue to recover, while stock indices are sailing higher shifting their enthusiasm from growth stocks toward value and cyclical recovery plays. Climbing bond yields have posed a challenge to the ascendancy of growth/tech focused companies but have underpinned an impressive rise in resource and banking shares over the March quarter.

The bank and commodity sectors have been notably supported by the 1H21 earnings reporting season which delivered the strongest upgrades to earnings expectations in more than 20 years.


Whilst the foundations of a broad economic recovery continue to provide ballast to an earnings and dividend uplift such as the banks and resource sectors, our attention has shifted to allocating new capital to quality companies that have lagged the recent sharp rally in equity prices. Notably, we see investment opportunities in stocks that have markedly underperformed in the latest part of the rally, namely:


o Offshore earners: Amcor, Brambles & CSL

o Reopening recovery plays: Ampol & Ramsay Health Care.

o Attractive dividend payers: Waypoint REIT.


Nonetheless, with equity prices elevated at levels well above long term averages we need to be conscious there are several factors that could pose a challenge to risk assets. Specifically, there are growing signs that the vaccine rollout in Australia and across many countries are facing unforeseen complications around efficacy and delays to distribution potentially delaying a full recovery in economic activity. Caution is also warranted over the historic level of liquidity and stimulus being used to support growth with the risk that economies become overheated fueling the need for higher interest rates to curb excess activity.


Yet for now, the only thing that matters to asset prices is fiscal & monetary policy largesse. From an equity market perspective current valuation (12-month forward PE for the ASX 200 ~18.1 times) the economic recovery is now largely priced into the ASX 200 following a ~50% rise in equity prices from trough in March 2020. Indeed, the market is now adequately reflecting the earnings recovery and upside will be more limited from here.



What is more interesting is the rotation we are already seeing within sector performance. The first recovery plays (commodities, banks) have started to plateau after significant outperformance this year. Overall, we are seeing earnings revisions moderating and outperformance maturing.


Our preference remains with Quality and Value, where our attention is now focused a stocks’ that have lagged in the recovery rally.


The Blended Australian Equity Portfolio finished the March quarter up 4.04% (+4.46% inclusive of franking credits) compared to the ASX Accumulation Index up 4.26%. Positive attribution for the Blended Australian Equity Portfolio was driven by Westpac (WBC), News Corporation (NWS) and BHP Group (BHP). Whereas Northern Star (NST), Ampol (ALD) and Cleanaway Waste Management (CWY) weighed negatively on attribution.