• Marcus Bogdan

Monthly Investor Update | July 2021

Portfolio Commentary


The Australian equity market continues to be bolstered by a stronger than expected recovery in company profits, with the ASX 200 on track to deliver earnings growth of ~25% for the 2021 financial year. The profits recovery has been dominated by the banks and iron ore producers. At a portfolio perspective, we expect that the market leaders of BHP and Commonwealth Bank to deliver a meaningful uplift in earnings and dividends and further underpin ongoing capital management.


Nevertheless, the degree of uncertainty remains elevated due to the more virulent Delta strain and the ongoing persistence of lockdowns affecting much of eastern Australia. Undoubtedly the magnitude of the lockdowns, particularly in NSW (~25% of GDP) is expected to slow economic and profit momentum in the September quarter.


The pathway to a reacceleration of economic activity is dependent on Australia’s success in vaccinating at least 70% of the eligible population by the end of the December quarter. To date, higher levels of vaccinated populations in the US and UK are illustrative of the importance in restoring economic momentum.


However, the level of uncertainty posed by the pandemic has underlined the importance of owning stocks that are industry leaders in the defensive sectors of consumer and industrial staples (Brambles, Wesfarmers, Woolworths) and healthcare sectors (CSL, Healius). We firmly believe that the attributes of earnings resilience and strong balance sheets remain valuable characteristics of the portfolio in delivering high quality earnings and dividends to our investors.


Portfolio Returns


Portfolio Outlook

While earnings momentum is expected to slow in the coming quarter, earnings growth is still expected to be in the vicinity of ~10% for FY22, supported by accommodative policy settings and the expectation that higher vaccine rates will ultimately lead to profit momentum returning. As such, the portfolio also holds stocks that should benefit from a reopening in the economy namely in the energy sector (Ampol, Santos) and industrials sector (Cleanaway, Qube).


Overall, the continued expansion of earnings for the ASX 200 is a key factor in supporting dividend per share momentum. The ASX 200 remains an attractive destination for income seeking investors, with the 12-month forward dividend yield at ~3.9%, the third highest in the world, supported by a dividend pay-out ratio of ~70%.



Market Commentary


The ASX 200 has so far been driven by the Big four banks and iron ore stocks this year and started the fiscal year with a modest gain of +1.1% in July, lagging a 2.4% rise in the S&P 500. Mining (+8.1%) was the best performing sector in July on the back of higher base metal prices with BHP (+10%) leading the index gains. Information technology and Energy fell 6.9% and 2.5% respectively, lagging the index. In terms of factor styles, High Dividend Yields stocks (+3.5%) and Quality (+2.5%) both performed well, consistent with the strong gains in major miners and the slowing cyclical momentum.


The economic recovery in Australia has been stronger than expected. The recent outbreaks of the virus are bringing more uncertainty for the economic outlook and GDP is expected to decline in September quarter. Australia’s largest city accounts for 25% of GDP and indicators of activity are already suggesting a slowdown. However, despite the ongoing spike in COVID cases, implying reduced effectiveness of lockdowns due to the greater transmission of Delta vs prior variants, the “net” impact of GDP partly has been offset by fiscal support lifting to $1bn +/week (and potentially $1.5bn) with up to ~$1bn from the Commonwealth, and up to ~$0.5bn from NSW.


The labour market in Australia has recovered with unemployment rate declining further to 4.9% in June. Some increase in the unemployment rate is expected in the near term due to the current lockdowns, but most of the adjustment in the labour market is likely to take place through a reduction in hours worked and in participation. Housing markets have continued to strengthen with strong credit growth and demand from owner-occupiers, including first-home buyers. Home prices boomed 1.9% m/m and the gains remain broad-based even in the lockdown capital of Sydney. The rising housing prices and low interest rates have also resulted in increased borrowing by investors.


The Reserve Bank Board has surprised the market by persisting with its planned tapering which is set to begin in September when the Bank will reduce its pace of bond purchases from $AU5bn to $AU4bn per week until at least mid-November. However, the Bank maintains optionality to reduce or increase its pace of bond purchases should the health outcomes deteriorate further and lockdowns persist longer than expected.