“The paradox is that the more successful central banks are in driving up valuations of risky assets using stimulus, the harder it becomes for them to exist.”
Matt King, Global Markets Strategist Citigroup.
In May, the ASX 200 rallied to a new record high emboldened by a stimulatory Federal budget and continued accommodative central bank support. The highly supportive macroeconomic environment has nurtured an impressive recovery for corporate earnings and dividends further propelling equity valuations to historically high levels.
A key beneficiary of Australia’s economic restoration has been typified by the retail banks which have delivered the strongest earnings and dividend upgrades. At a portfolio level both Commonwealth and Westpac (Australia’s largest mortgage banks) are well placed to benefit from the momentum in housing loan growth. Moreover, CBA is enjoying the dual benefit of being leveraged to stronger housing market and delivering above-system volume growth. Overall, the mortgage led banks (CBA, SUN, WBC) are in an earnings recovery phase that will restore their appeal to deliver an attractive dividend income stream for investors.
Earnings upgrades have been a tailwind in bolstering valuations with the ASX 200 Price Earnings Ratio (PER) for December 2021 trading at ~18.5 times, a hefty premium of ~25% to its 30- year average. However, whilst Australia’s corporate earnings have almost been restored to their pre-pandemic highs, we would contend that much of that good news in now fully reflected in current market valuations. It is becoming harder to unearth pockets of value in the market. Moreover, the combination of rising inflation pressures and higher bond yields could begin to act as a headwind for interest rate sensitive sectors. As such, we feel a more cautious approach is warranted and greater emphasis on earnings quality and balance sheet strength remains a core focus for the portfolio.
Blended Australian Equity Portfolio | Monthly Attribution
The Blended Australian Equity portfolio finished the month of May up 3.48% compared to the ASX 200 Accumulation Index up 2.34%. Positive contribution for the portfolio was driven by Westpac (WBC) Commonwealth Bank (CBA), and CSL Limited (CSL). Whereas Ramsay Health Care (RHC), Cleanaway Waste Management (CWY) and Santos (STO) weighed on attribution.
Australian Equities Income Portfolio | Monthly Attribution
The Australian Income Portfolio finished the month of May up 3.37% compared to the ASX 200 Accumulation Index up 2.34%. Positive contribution for the portfolio was driven by Commonwealth Bank (CBA), Westpac (WBC), and Woolworths (WOW). Whereas Ramsay Health Care (RHC), Macquarie Group (MQG), and Cleanaway Waste Management (CWY) weighed on attribution.