July 15, 2020: Live from the desk of our CIO, Piers Bolger

July 15, 2020: Live from the desk of our CIO, Piers Bolger

July 15, 2020: Live from the desk of our CIO, Piers Bolger 150 150 Piers Bolger

The June 2020 financial year has just finished up, and we thought it would be worthwhile to look back at the performance of financial markets over the last 12 months – where we’re seeing the returns being generated, and whether or not we’re likely to see a similar profile as we head in to the second half of this year, and into 2021.

The chart below shows performance of the ASX200. You can see that the broader market return on the far left-hand side was down roughly around about 8% over the course of 2020 – one of the few years in recent times that we’ve actually had a negative return.

This has been caused in part by negative returns from the energy sector, which was down considerably due to the weak oil price – and demand for oil – throughout 2020. Much of this has been driven over the last six-month period, when we saw lockdown on a global level.

Domestically, the decline in banking stocks over the last 12 months has also had an impact, again, driven by COVID-19 lockdown and demand for credit falling away. This has had a significant impact on the growth outlook for financial stocks, and the performance of the equity market overall.

However, three key areas have been stand-out performers.

Consumer staples have certainly benefited over the last 12 months. We saw quite a significant pickup in sales on the back of the lockdown, with people starting to hoard goods. Both the healthcare and IT sectors have also continued to remain very robust in terms of their performance over the last 12 months, and they’ve been positions that we’ve held in our portfolios for an extended period.

We continue to see those two parts of the market benefiting from changing consumer behaviour and the quality of the businesses we have in the local market. The IT sector has benefited from the need for increased data storage and solutions. Meanwhile, healthcare companies like CSL and ResMed have benefited from both domestic and global demand for their products and services, for example, with ResMed supplying ventilators to the US.

From an Australian point of view, it’s been a mixed bag. We continue to expect that this will be the case.

We would like to see a broader distribution of performance coming from other parts of the market. There could continue to be some opportunities, particularly in the materials and industrial space. But certainly as we sit here today heading into reporting season, it’s going to be a challenging period for parts of the market. It is likely that growth will continue to be slow for some time to come through the second half of this year.

The chart below provides a snapshot for global financial markets, looking broadly across multiple asset classes.

Cash, Australian fixed income and global fixed income have all delivered positive returns. In the context of a broad-based, diversified portfolio, those defensive sectors have done the ‘heavy lifting’ over the last 12 months.

This demonstrates why you have diversity in the underlying asset profile within a portfolio. It enables you to be able to deliver an investment return when markets have been volatile, and protect some of the downside performance in a portfolio with defensive asset classes in more troubling times.

Equally, we’ve seen global equities over the last 12 months deliver a positive return.

From our perspective, there are a couple of elements associated with that.

First and foremost, there is the diversity of underlying investments that exist on a global level. There is no one, single sector that covers a significant proportion of global financial markets on its own.

This is a benefit because you can get that spread of investments across multiple industry segments without having a significant exposure to just one part of the market, like we do in Australia, for example, with our banks.

Secondly, there’s the performance of Australian dollar.

The fact that the Australian dollar has fallen – against both the US dollar and other currencies over that 12-month period – has provided a benefit to investors in offshore markets. These investors are able to repatriate those offshore earnings into Australian dollars, and this has assisted the performance over those 12 months.

However, in the period between January and June of this year, we have seen all equity markets struggle. Global equity markets are no different. We also saw some significant declines, particularly related to the property/listed property space, including domestic A-REITS and global REITs. Again, when you think the declines we have seen in economic activity, manufacturing and use of commercial office space, there are no surprises there.

All of this has been translated into the performance of those sectors, particularly over the last 12 months.

As we look forward, we continue to expect those parts of the market to be challenged.

Infrastructure could benefit market performance as recovery starts to take hold into 2021. However, in the near term, with economic activity relatively constrained, we expect the challenge to continue.

But when it comes to performance, there have been some winners in terms of asset class through 2020.

As we sit here today, thinking about the next six, 12, 18 months, we do expect the financial markets to remain challenged. Economic activity is still a fair way away from what it was pre-COVID.

But we think the ‘normal’ going forward is going to look quite different to what we saw before the pandemic hit. This will have implications for both financial markets and the speed at which economic recoveries occur. It will also ultimately have implications in terms of those sectors that may be the ‘winners’ over the next little while.

As always, we’d love to hear from you. And if you have any concerns about your portfolio, please feel free to reach out to your advisor.

Piers Bolger is Chief Investment Officer at Viridian Advisory

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