Where to from here?

The Australian stock market continued to rally in June, albeit at a slower rate of 2.4%. In comparison, the fund returned 1.2%¹. The last three months has seen a dramatic rally from the even-more-dramatic sell-off seen in February and March. For the three months to 30-Jun-20 the fund has returned 19.1%¹, compared to the broader market’s return of 16.8%.

The question now is ‘where to from here?’.

Of course, the answer is unknowable before the fact, especially in the short term, and we will not try to make such a forecast. However, we do admit to being broadly positive in the medium-term outlook as highlighted in the full commentary below.

Top Holdings (alphabetically)

Ampol Limited Australia Energy

ANZ Banking Group Australia Financials

BHP Group Ltd Australia Materials

CBA Australia Financials

Contact Energy New Zealand Utilities

NAB Australia Financials

Spark New Zealand Ltd New Zealand Communication Services

Telstra Australia Communication Services

Waypoint Reit Ltd Australia Real Estate

Westpac Australia Financials

The Australian stock market continued to rally in June, albeit at a slower rate of 2.4%. In comparison, the fund returned 1.2%¹. The last three months has seen a dramatic rally from the even-more-dramatic sell-off seen in February and March. For the three months to 30-Jun-20 the fund has returned 19.1%¹, compared to the broader market’s return of 16.8%.

The question now is ‘where to from here?’.

Of course, the answer is unknowable before the fact, especially in the short term, and we will not try to make such a forecast. However, we do admit to being broadly positive in the medium-term outlook.

We see the following factors as supportive:

• The slowdown in economic activity has been self-induced and is not a result of the usual economic drivers. Indeed, it was generally thought the economy was on an upward trajectory before the intervention of the virus.
• The policy response has been enormous from both fiscal and monetary standpoints (and, as a result of the previous forecasting error, the Federal Government has plenty of ability to extend the stimulus should it become necessary).
• The economic and company-specific performance data so far has been much better than many had feared, with record retail sales and lower unemployment being two prominent examples. While not a guarantee of continuing outperformance, it does suggest that the initial dire forecasts were exaggerated and that the base level of the economy has not been dented as badly as many expected.
• Our investable universe is listed companies, which tend to be the larger companies in their sectors, have access to capital, and in many cases will emerge from this episode in a stronger competitive position than before, taking market share from their unlisted competitors.

As might be expected in the calmer market that was June (certainly compared to March, April and May), the fund was less active.

The major addition was a holding in Amcor. We are attracted to Amcor not just because of its defensive qualities as a packaging supplier to consumer staples and healthcare companies but also because of its dividend yield (~4.5%) and it’s valuation (~15.5x FY21 P/E) which we see as too cheap.

On the other side of the ledger, we exited our position in InvoCare on the news that the CEO would not be seeking a new contract. We were already concerned with the extra earnings per share dilution from the recent capital raise and the prospect of a very benign flu season (due to anti-COVID measures) and the fact the CEO was leaving put our investment thesis into too much doubt.

In closing, we think it is plausible that we will see a period of consolidation after the recent steep rebound. The upcoming profit reporting season will be important, not so much for the now-historical FY20 results, but the outlook for the next 12 months and longer, evidenced by the recent trading trends shown in the accounts and the accompanying management discussion.