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  • Writer's pictureMarcus Bogdan

Quarterly Investor Letter - September 2020

The economic roadmap has been dramatically redrawn by the coronavirus pandemic. We have entered a new economic paradigm, whereby the combination of monetary and fiscal

support is unprecedented in scale, speed, and breadth. The steering wheel is now firmly shared by central banks and governments to inoculate the economy.

The policy mix of ultra-low interest rates together with a significant fiscal boost has visibly supported momentum in the global economy. Global economies have staged a V-shaped

recovery since the lows of March as companies have rebuilt manufacturing inventories. Encouragingly, global manufacturing PMI data further expanded in September, extending the sharp rebound in manufacturing activity since May. Our market view is constructive to more cyclical sectors based on a firmer global outlook.

Barring major economic missteps or COVID-19 setbacks, Australia is well placed to continue to move toward normal activity levels by FY21. The evolution of policy support by the

federal government has been a pivotal feature of the recovery and we expect this to continue.

Over the September quarter, we have tilted our portfolios to more cyclically based companies by adding to the banks and energy sectors, including initiating positions in Westpac (WBC) and Santos (STO).

The Blended Australian Equity Portfolio finished the September quarter down -0.11% (+0.23 inclusive of franking credits) compared to the ASX Accumulation Index down -0.44%. Positive attribution for the Blended Australian Equity Portfolio was driven by Healius (HLS), News Corporation (NWS) and Chorus (CNU). Whereas Ampol (ALD), Qube Holdings (QUB), and Santos (STO) weighed negatively on attribution.

Australian retail banks have dramatically underperformed the ASX 200 by 37% on a rolling 3 years faced with the headwinds of slowing credit growth, deteriorating net interest margins,

& higher regulatory costs. The challenging industry dynamics has supported our underweight position in the banks since the inception of the portfolios. However, bank valuations are now largely reflecting these concerns.

Increasing portfolio allocation to the Banking & Energy sectors

We see nascent prospects for an improvement in the outlook for banks supported by fiscal stimulus for the housing sector and the recent government announcement to ease regulations around bank lending.

We have increased our exposure to the energy sector through the purchase of Santos (STO). Energy has lagged the materials significantly in 2020. As economic activity normalizes in 2021 energy prices should be a beneficiary of an uplift in demand from the industrial and transportation sectors.


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