Financial Keys Quarterly Update
Below is a summary and highlights from the movements this quarter and major changes to some of the key asset classes:
The Australian equity market (as measured by the S&P/ASX 200) continued its recovery surging (+13.7%) in the December quarter, underpinned by a rise in sentiment as positive vaccine trials and rollouts became closer to realisation. After a tough finish to the September quarter, the market slowly began to recuperate in October as the release of the federal budget provided confidence that fiscal policy was to continue supporting the economy.
A further rate cut in November coupled with easing of COVID related restrictions saw the market power ahead, building on the rotational trade into cyclical sectors which had begun the month before. As a show of resilience, the share-market ended calendar year 2020 in the black, posting a return of (+1.4%).
Quarterly returns across all sectors, except Health Care and Utilities, reflected the confidence and optimism that had grown during the quarter. Supported by the iron ore price (+32%), cyclical sectors (Energy +26.3%, Financials +22.8%) led the way, ably supported by Materials (+15.4%), Real Estate (+13.7%) and Consumer Discretionary was up (+11.1%). Information technology continued its impressive run, returning (+24.8%) whilst Communications Services also provided a double digit return of (+12.3%).
As the large cap sector continues its recovery, opportunities outside the top 100 i.e. mid and small-cap sectors, continue to present attractive opportunities culminating in impressive outperformance, (+15.5%) and (+13.8%) respectively for the quarter (+13.4% and +9.2% for calendar year 2020).
All major developed and emerging markets, although performing well for the quarter, underperformed the Australian market due to the continuing rise in the Aussie dollar.
In the US, the lead-up to the Election, or more of note, the outcome, proved to be the trigger to set-off market uncertainty and volatility not only locally, but globally. Coupled with second and third waves of COVID-19 running across the world, in the December quarter the S&P 500 managed however to return a solid (+4.0%) in AUD terms. Optimism gained traction in line with a result of a large fiscal spending US Democratic party winning office.
Emerging Markets (as measured by the MSCI EM index) returned a strong (+11.2%); Europe (as measured by the STOXX Europe 600 index) returned a solid (+7.1%) whilst the MSCI AC Asia Ex Japan also recorded a strong return of (+10.2%); all of which were aided by further optimism towards a COVID-19 vaccine and cyclical recoveries. Positive currency movement relative to the USD and commodity price support also provided further assistance to market appreciation.
Property & Infrastructure
The Australian listed property sector (S&P/ASX 200 A-REIT) also benefitted from the rotational trade into cyclical sectors during the quarter returning (+13.3%) however the sector remains structurally challenged (divergence in performance across sub-sectors) due to the pandemic, slowing / re-opening of the economy.
This is evident in the calendar year return with the sector falling (-4.6%). Global listed property (+10.2) and global listed infrastructure (+5.9%) provided solid returns for the quarter on a currency hedged basis, however the continuing appreciation of the Aussie dollar hurt unhedged returns (5.8%) and (0.9%) respectively.
Bonds and Cash
The RBA and central banks globally remained accommodative in support of bond markets via stimulus programs. Yields on 10-year treasures, both domestically and globally, rose slightly during the quarter as confidence grew off the back of vaccine news. Bond returns were muted again however in the December quarter. Australian bonds (Bloomberg AusBond Govn 0+Yr) hit negative territory on a real basis (-0.3%) whilst global bonds (BBgBarc Global Aggregate TR Hedged) were slightly positive (+0.8%). Corporate bonds squeezed a little more spread during the quarter and continued to outperform government bonds. Higher yielding bond assets remained broadly buoyant with cooperative monetary policy in place; cash yields took another hit as the RBA cut the official rate in November to its lowest in history, dropping to 0.10%.
We had virus outcomes worsen over the quarter as the northern hemisphere entered their colder months, which resulted in an increase in cases and hence an increase in restrictions and lockdowns. On the positive side, we saw the announcement of successful phase 3 trials for three different vaccines, with two granted emergency use authorisation before the end of the year.
We also had the US election result, with Joe Biden and Kamala Harris all but confirmed (since confirmed) as the new 46th President and Vice President of the USA. The election result also saw the Democrats retain the House but with a smaller majority, whilst the Senate remained undecided as the state of Georgia had a run-off to confirm their two seats. Leading into the election, most had a mixed or messy election result being negative for markets, but investors seemed to find positives in the result.
The UK and the European Union (EU) finally struck a trade deal with no time to spare before their self-appointed deadline, which saw the UK finally and formally exit the EU.
Closer to home, there was plenty to assess and absorb. On the virus front, politicking over state borders continued, whilst we also saw increased restrictions leading into Christmas on a relatively small number of cases.
We had important announcements on both the fiscal and monetary policy front with the Federal Treasurer handing down one of the biggest budgets in decades with deficits expected for the next 4-5 years and federal debt likely to clear the trillion-dollar mark in the not-so-distant future, all in the name of helping the economy recover from recession in 2020 and to assist in kickstarting the recovery in 2021.
This was followed up with a big, but expected, announcement from the Reserve Bank of Australia where they lowered the RBA Cash Rate to an all-time low of 0.1%, provided the banks with cheap borrowing lines to encourage them to lend, and kickstarted Australia’s first foray into quantitative easing (QE) with a program for $100 billion.
Last, but not least, Australia-China relations continued to sour over the quarter, with the Chinese targeting almost all Australian exports with the exception of iron ore.
From a market perspective, investors focused on the positives in the quarter with successful phase 3 vaccine results resulting in a very aggressive rotation into cyclical and Covid-exposed sectors and stocks, whilst continued support from government and central banks along with a Joe Biden presidency likely leading to considerably more US fiscal support led to broader support for markets, particularly growth assets.
Cash and bond returns, whilst positive, were weak given extremely low central bank cash rates and very low bond yields, with significant bond buying by central banks continuing through their quantitative easing programs. Assets denominated in Australian dollars performed strongly as the Australian dollar rose on soaring iron ore prices whilst the US dollar continued to weaken.
The outlook is rather positive from here, considering the continuation of considerable fiscal and monetary stimulus, which along with the vaccine rollout picking up pace, should see economies slowly re-open and a subsequent strong bounce in economic growth.
At the same time, given the low returns on offer from defensive asset classes like cash and bonds, we’re likely to see significant weight of money flow into growth asset classes like equities, property, and infrastructure. Household savings rates are very high, cheap debt is on offer for both households and businesses, and we’re likely to see government invest considerably in infrastructure.
In saying that, governments and their health advisers have bet the farm on vaccines being their only solution to eliminating lockdowns as a policy response. As such, risks remain regarding the rollout of the vaccine and the willingness for people to take the vaccine. In addition, the economic damage caused in 2020 won’t be repaired and recovered for some time, and some sectors and businesses won’t ever recover.
Last but not least, inflation is back on the agenda given the significant fiscal response we’ve seen and are likely to continue seeing. Inflation, and inflation expectations, present both opportunities and risks, whilst also requiring different portfolio settings and resulting in different portfolio outcomes.
Key High Growth Model - Portfolio Update
The Portfolio produced a strong absolute return in the December quarter, however the performance was hampered by a rising Australian dollar reducing the return of our overweight international equities position.
From an asset allocation perspective, the portfolio’s unhedged currency positioning across global growth assets (equities, property, infrastructure) hurt relative returns as the Australian dollar rose strongly on the back of soaring iron ore prices. Absolute returns from these assets were still strong for the quarter.
From an investment selection perspective, we were pleased to see strong absolute and relative return performers across the portfolios, but some investments underperformed for this relatively short period.
Within Australian Equities, we saw very strong absolute returns supported by a rising Australian dollar, but mixed relative results across the portfolio. Greencape continued to perform strongly but underperformed the broader market as the market rotated aggressively into cyclical and Covid-exposed names on the back of vaccine optimism. Allan Gray was the standout, outperforming the market by almost 10% as their Value style approach was well supported by one of the biggest rotations into Value stocks we’re ever seen. Solaris underperformed the market over the quarter as stock shorts dragged on returns in a strongly rising market. They also didn’t benefit as much as expected from their cyclical positioning as the most Covid-exposed stocks (which Solaris doesn’t own) had the biggest bounce. Flinders Emerging Companies also performed strongly in the small-cap segment but underperformed their benchmark.
Within Global Equities, there were quite mixed results across the portfolio mainly due to different manager styles and approaches. The Growth style did well early October and mid to late December. Value performed very strongly from the back end of October through to early December, whilst the Quality style was quite weak through most of the quarter as investors took profits from these stocks following a very strong 2020. Those gyrations and rotations largely explained the mixed results across this part of the portfolio.
T. Rowe Price, a growth biased manager did exceptionally well to outperform the broader market, helped by their stock diversification and very strong portfolio construction. Orbis was the standout from an absolute perspective, benefiting from the strong rally in value and cyclical stocks. AB Global produced an index-like return, a little underwhelming given their cyclical positioning but not unexpected given their quality overlay (not too dissimilar to Solaris’s approach in Australian equities). Insync and Magellan both dragged on returns given their Quality style biases, which is where most of the market concentrated their profit-taking. Fidelity Global Emerging Markets performed strongly on both an absolute and relative basis, with the region assisted by a weakening US dollar and the portfolio benefited from strong stock selection and portfolio positioning.
Within Property & Infrastructure, both exposures in the portfolio hurt relative returns as the Australian dollar rose strongly. Absent currency movements, Quay produced a very strong result outperforming the unhedged index, owing to strong stock selection and positioning. Magellan lagged on both an absolute and relative basis, as their overweight to utilities was hurt by rising bond yields whilst the zero weighting in emerging markets also detracted as infrastructure assets in the region rallied strongly.
As mentioned in previous quarterly updates, the following remains relevant today:
As outlined above, the different asset classes and then the individual investments within them, have varying returns over all timeframes. This is the outcome of diversification across not only asset class but also the types of investments held e.g. those businesses that have done well during a lockdown environment such as those in technology, compared to the more ‘cyclical’ businesses that will do better in an environment of re-opening, economic recovery and one in which a vaccine is created and widely used.
We aim to ensure portfolios hold investments which can perform well in a range of market environments and an outcome of this is that they do not all move in unison. What all of the investments can do though, is provide a positive return over time, despite going through periods of volatility.