From Jonathan Bayes, consultant Chief Investment Officer, Bentleys Wealth Advisors
A big few weeks and months ahead
For a variety of reasons, the coming few weeks and months are likely to prove far tougher for equity investors.
Whilst increasingly there is good reason to distinguish between countries and economies who have managed the COVID-19 outbreak well (New Zealand, China, Korea, Taiwan etc), the poor response in the United States is likely to begin to impact on consumer demand and thus most other equity indices are likely to be tarnished with the same brush.
Corporate reporting season kicks off in the coming week, with major US banking stocks reporting.
Major technology companies will follow suit with Netflix (NFLX) due this Friday night and Amazon (AMZN), Twitter (TWTR), Tesla (TSLA) and Microsoft (MSFT) all reporting next week.
It is difficult to expect many companies to provide anything other than a cautious outlook.
In addition, the coming fortnight will see governments in Australia and the United States outline their intentions with respect to continuance of economic support packages for workers and businesses impacted by social restrictions.
In both countries expanded unemployment insurance payments have been a godsend in protecting against even worse economic deterioration than has been seen, so the significance of additional measures insofar as how they compare to existing payments is critical.
In both countries there is a growing call for tapering back support which carries with it enormous risk, particularly if citizens feel uncertain about their ability to freely move in and around the economy without fear of infection.
As an example, despite the US$2ln in stimulus provided by the CARES Act, at its time an unprecedented level of stimulus, the American economy on most measures is running down -5% to -7% on the level of activity seen this time last year and with over 30m Americans (20% of the workforce) still receiving unemployment insurance.
Anything short of extending this support without the ability of workers to return to employment leaves the potential for a gaping hole in future economic demand.
The same can be said in Australia and we look forward to learning more about the government’s plans next Thursday 23rd at the Federal Government’s Mid-Year Economic and Financial Outlook statement.
Beyond stimulus news and corporate reporting, the Presidential Election on November 3rd looms as a major catalyst (and hurdle) for investors to overcome furthermore.
A quick COVID-19 update
We haven’t spoken much about the COVID-19 outbreak in the United States in a few weeks or more, but feel it appropriate to offer some brief thoughts here as we think the issue is likely to become of increasing market focus the closer we draw to not only Election Day in the United States, but the re-commencement of school due in the first week of September.
School, as we are learning first-hand here in Australia, is of vital importance in allowing the economy to return to normal in that it frees up parents to re-enter the workforce.
With the COVID-19 daily case count in the United States reaching 70,000 a day and hospitalisations rapidly increasing, we expect it is only a matter of time before mortality rates similarly begin to climb.
Whilst a lot has been made of the falling infection fatality rate and of more younger people contracting the virus, we would caution to be too optimistic on this front since the insidious level of infection present in the United States now means it is inevitable that it will at some point begin to impact those demographic groups most at risk such as older people and those with pre-existing conditions.
In the United States there are 24m+ people diagnosed with diabetes and some 100m who are considered pre-diabetic.
In some ways you can think of COVID-19 as the tinderbox and co-morbidities such as diabetes, obesity, heart troubles or respiratory problems as the hardwood.
With infection rife, and a huge cohort of the population at risk, the debate over a safe re-opening of the U.S school system is set to escalate and will be a major focus for investors in the weeks to come.
There will be a huge number of teachers unsure of their willingness to re-enter the classroom with this as a backdrop.
Technology stocks and positioning
It’s been said that bull markets are born on pessimism, grown on scepticism and die on euphoria.
Whilst I wouldn’t suggest that equity markets in general are euphoric, the subset of equities across technology and healthcare sectors is.
The NASDAQ index is up an incredible 15% in 2020 and valuations for this index are back at over 30x which is their highest since the days of the tech-boom.
As the world has rapidly shifted activity and consumption online, technology companies in particular have, for the most part, been a net beneficiary of policies associated with COVID-19.
With that, investor positioning has followed suit.
At their highest valuations in almost 20-years, investor positioning has become extremely crowded in the sector and highly prone to disappointment either from earnings outlooks delivered at results in the coming month or from the likely policies implemented under a Biden Presidency.
Increased regulation and taxation is assured and will fall disproportionately on technology platforms and the other bull-market sector of recent months, healthcare.
We see increasing risks to technology and healthcare stocks and to the broader NASDAQ in the coming months.
To end on a positive note
Despite the likelihood of some tricky weeks and months ahead in both the United States, Europe and Australia, we should observe and celebrate the success of countries such as New Zealand, Korea, Taiwan, China and Japan in their handling of the crisis.
As you can see from the chart below, the NZ economy is rapidly rebounding back to levels seen pre COVID-19.
The chart below is the ANZ survey of Business Activity Outlook and demonstrates that following their strict lockdown, and with ongoing test and trace, the economy is rapidly recovering to previous levels.
Whilst the recovery isn’t as strong in north Asian economies given softness in their material export sectors, the data continues to improve and is significantly more progressed than the tepid recoveries seen elsewhere.
Looking ahead
| Monday | n/a |
| Tuesday | AU ANZ Weekly Confidence, AU NAB Business Confidence (JUNE), US Small Business Confidence (JUNE), US CPI (JUNE) |
| Wednesday | AU Westpac Consumer Confidence (JULY), US Empire Manufacturing (JULY), US Beige Book |
| Thursday | AU Employment (JUNE), US Retail Sales (JUNE), US Weekly Jobless Claims, US Weekly Consumer Confidence, US NAHB Housing Confidence (JULY) |
| Friday | US Building Approvals/Housing Starts (JUNE), US Michigan Consumer Confidence (JULY) |
It all starts to hot up from here on in as corporate reporting season starts properly this week, with a major focus on the banking sector initially, before big-tech gets underway Friday with Netflix (NFLX) and then the following week with results from Microsoft (MSFT), Amazon (AMZN), Twitter (TWTR) and Tesla (TSLA).
Australian results become a feature in early August.
Next Thursday 23rd July the Australian Federal Government will hold their deferred Mid-Year Financial and Economic Outlook (MYFEO) statement and in which they will outline plans for any extension or amendment to current support measures such as the Job-Keeper supplement.
In the United States the second fiscal package to replace the current CARES package which includes the PPP and additional unemployment benefits of US$600/week is expected, but precise timing is unknown.
Given the PPP ends at the end of July it would seem highly likely that news on that front emerges this week or next.
Friday 5pm values
| Index | Change | % | |
| All Ordinaries | 6036 | -127 | -2.0% |
| S&P / ASX 200 | 5920 | -138 | -2.3% |
| Property Trust Index | 1201 | -64 | -5.0% |
| Utilities Index | 7539 | -258 | -3.3% |
| Financials Index | 4780 | -155 | -3.0% |
| Materials Index | 13598 | +97 | +0.8% |
Friday closing values
| Index | Change | % | |
| U.S. S&P 500 | 3185 | +55 | +1.8% |
| London’s FTSE | 6095 | -62 | -1.0% |
| Japan’s Nikkei | 22290 | -16 | -0.1% |
| Hang Seng | 25727 | +354 | +1.4% |
| China’s Shanghai | 3383 | +231 | +7.7% |
Key dividend
| Date | |
| Mon 13 July | n/a |
| Tue 14 July | n/a |
| Wed 15 July | Div Pay-Date – Qualitas Real Income (QRI) |
| Thu 16 July | n/a |
| Fri 17 July | n/a |
–
Tuesday 14 July 2020, 10am
For more information on the above please contact Bentleys Wealth Advisors directly or on +61 2 9220 0700.
This information is general in nature and is provided by Bentleys Wealth Advisors. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decision based on this information.
