June 3, 2020: Live from the desk of our CIO, Piers Bolger

June 3, 2020: Live from the desk of our CIO, Piers Bolger

June 3, 2020: Live from the desk of our CIO, Piers Bolger 150 150 Piers Bolger

Here we are through the end of May and once again equity markets had another good, solid month in terms of performance. Our local market was up roughly around 4.5% for the month.

A lot of that was driven by the uptick that we saw in the small to mid cap part of the market, with the small caps up roughly around 11% over the course of May. That’s a significant rally that we’ve seen in that part of the market that’s continued on over the last couple of months. Globally, equity markets were also stronger. Global markets were up roughly about 4% as well. Again we saw parts of that market also do relatively well, particularly in the small cap segment, which has enjoyed a nice rebound off the lows that we’ve seen over the last six to 12 months. The REIT side of our market was again stronger. It was up roughly about 7% for the month, enjoying a nice recovery through both April and May, particularly after a very difficult March period.

When we look at the performance drivers locally, IT continued to be the mainstay of the performers. The sector was up roughly 4.5 % for the month. It was pleasing that we had good contributions from all parts of the market with the only two negative sectors locally being the healthcare sector as well as consumer staples. We’re continuing to see that rotation out of staples, particularly into a high growth part of the market. As it relates to healthcare, it’s been a phenomenal rally. We certainly saw some profit-taking, particularly as the economy started to move out of the lockdown associated with COVID-19 and some of the issues from a healthcare point of view in the demand cycle that we’re seeing there also started to mitigate somewhat.  But overall we’ve seen a really strong performance for equity markets continuing on from the bottom that we saw through the back end of March.

This month, we thought it’d be worthwhile showing you the performance of the Australian dollar. With the performance locally in terms of equity markets, we’ve also seen the Australian dollar move higher.

Market recovery and Australian Dollar strength

This chart just gives you a snapshot in terms of the performance of the Australian dollar versus iron ore prices. Iron ore has jumped pretty considerably recently, we saw ore up around 10.5% through May alone and there was a few reasons for that. The Australian dollar, being a procyclical and commodity based currency, also saw saw a rally over that period seeing around 15% off its lows, despite the fact that it’s still trading about 5% lower calendar year to date. It’s important when thinking about investing, particularly in offshore markets, currency can have a big impact on the total return of the portfolio. So, from our perspective, it’s always worthwhile just keeping one eye on understanding some of the key drivers and mechanics as it relates to currencies.

From our perspective, we think there are a couple of key drivers at the moment that are assisting the Australian dollar. As you can see commodity prices, particularly iron ore, and also other major export commodities have moved higher. But equally on the supply side, we’ve seen that demand shift somewhat. Brazil, which is another big producer of iron ore, continues to struggle with COVID-19 and that’s now having an impact in regards to its materials sector and certainly some of its bigger mining companies and that benefit in terms of the supply side is coming through. From a demand point of view, we are starting to see some better numbers coming out of China, particularly as it relates to the industrial and manufacturing side of the economy, the expansion is slowly starting to become a little bit more concrete in nature. That again has been beneficial for the demand for commodities like iron ore, particularly in regards to steel making.

As we head into the back end of this quarter, it’s looking reasonably solid. Valuations continue to remain relatively elevated, in our view. In the context of performance in the near term, we wouldn’t be surprised if we have some consolidation at these levels and potentially some level of pullback.

From an overall construct perspective, we think that the stimulus packages, both from central banks as well as on the government side, will continue to provide a really good platform for equity markets, particularly through the second half of this year as the economy starts to reopen and corporates start to rebound into 2021. From an Australian point of view, we think that the markets are well positioned and the economy is certainly ahead of the game in our view relative to the rest of the world. We think that is continuing to drive investment locally and the performance of our local share market, and equally some of the opportunities we’re seeing more broadly.

Piers Bolger is Chief Investment Officer at Viridian Advisory

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