Portfolio Update - April 2020
Risk assets moved considerably higher in April supported by massive liquidity infusions by authorities and signs that the worst of the pandemic may now be behind us. While we do not share the UK prime minister Boris Johnston’s optimism that we were now approaching “sunlight and pasture”, forthright action taken by governments has cushioned the deepest elements of financial destruction. Thankfully, we are starting to observe more positive signs of economic activity, notably:
-> In China, there is growing evidence that demand for manufacturing, civil construction and infrastructure have recovered relatively quickly. Australian iron ore producers (BHP, Fortescue, and Rio Tinto) should be beneficiaries of a recovery in China.
-> In healthcare, the resumption of elective surgery will support the private hospital utilisation rates moving back to rates to over 50% in the coming weeks. There are also signs of potential recovery in general practice, diagnostic, and pathology levels
Notwithstanding this, the pathway for the recovery of economic activity to pre-COVID 19 levels will be protracted due to the permanent impost of social distancing and the time required to restore corporate and household balance sheets. Our preference for companies that are structurally sound both from an earnings and balance sheet perspective remains resolute. The 20% rally in the ASX 200 from its March lows has lifted the 12-month PE to around 16 times, 12% above its long-term average. Valuations are being supported by bond yields anchored at historic lows, which further bolsters the attractiveness of the 12-month forward dividend yield at circa 4.5%. However, in the short term we feel that equity markets have rebounded too quickly given that the balance of risks for economic activity and earnings are still skewed to the downside. Blended Australian Equity Portfolio | Australian Equities Income Portfolio The Blended Australian Equity Portfolio finished the month of April up 6.83% compared to the ASX 200 Accumulation Index up 8.78%. Positive contribution for the Blended Australian Equity Portfolio was driven by Macquarie Group (MQG), BHP Group (BHP) and Healius Limited (HLS). Whereas, Woolworths (WOW), Coles Group (COL), and Telstra weighed on attribution. The Australian Income Portfolio finished the month of April up 6.16% compared to the ASX 200 Accumulation Index up 8.78%. Positive contribution for the Australian Income Portfolio was driven by Macquarie Group (MQG), BHP Group (BHP), and Healius Limited (HLS). Whereas, Woolworths (WOW), Coles Group (COL), and Commonwealth Bank (CBA) weighed on attribution.