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How a return to pre-COVID norms is a ‘wake-up call’ for investors
News of a COVID-19 vaccine is a wake-up call for markets, with consumers tipped to return to their previous habits, an industry expert has stated.
How a return to pre-COVID norms is a ‘wake-up call’ for investors
News of a COVID-19 vaccine is a wake-up call for markets, with consumers tipped to return to their previous habits, an industry expert has stated.
Analysts at SG Hiscock & Company suggest the Australian market has shifted from a ‘hope’ to a ‘growth’ phase with a positive outlook for 2021.
Hamish Tadgell, Australian equities portfolio manager, said the huge coordinated policy response from central banks and governments around the world is supporting a more sustainable growth recovery for equity markets.
“Following the fastest despair phase in history, we have experienced one of the strongest hope-based recovery phases we’ve ever seen,” he said.
“On average, it has taken around three years for the market to return to its previous peak earnings level following a downturn. However, the event-driven nature of this crisis, coupled with the paradigm change in fiscal policy support and rise in household savings, makes it very different to the post-GFC recovery. This provides the potential for a much faster return to pre-crisis earning.
Mr Tadgell explained how he is tilting his investment thesis towards companies that will capture the shift from hope to growth and in particular seeking to relocate more towards quality cyclical companies that will benefit from the return to normal.
“This includes energy companies such as Woodside Petroleum and Cooper Energy, and we’ve also increased our weighting towards banks, which are now at our highest level in over 10 years,” he said.
“Nonetheless, there remains uncertainty around how long we will have to live with the virus and the timing of a vaccine, and there is a need to remain vigilant.
“There will no doubt be bumps in the road with the manufacturing and distribution of the vaccine and path of earnings recovery. At this time, more than ever, a disciplined and active investment approach is required,” Mr Tadgell told investors.
But the COVID crisis has its differences from other recessions in history – one being that household income increased through the period, due to JobKeeper and other fiscal support measures.
SG Hiscock AREIT portfolio manager Grant Berry pointed out how Australians have their highest savings rate since the 1970s.
“It raises a few questions. Is the savings rate this elevated because people are fearful and they’re not spending and they’re saving because they’re bunkering down? Is the savings rate because people are essentially locked down in their homes and therefore their ability to spend… is impaired?” he said during an SG Hiscock media briefing.
“Or is the savings rate essentially this high because people just don’t have the need to spend?”
Importantly, consumer confidence is the highest it has been in seven years, the manager commented.
“People are not saving because they’re fearful, not at all. People are saving because they’re not out and about as much, and they’re not needing to spend as much, so they’ve built up this chest of savings,” he said.
The Australian retail sector is expected to benefit from consumers’ improved balance sheets as Christmas approaches, with sentiment rising on the news of a vaccine and Australia enjoying lower case numbers and eased restrictions.
Instead of remaining cautious around going out in public, Mr Berry believes consumers “want to get out”, having been deprived of experiences, with pent-up demand. He referred to a rise in retail foot traffic through the Black Friday sales period.
“The market has been extrapolating the stay-at-home scenario… We’re at the other side of that see-saw. Australia’s position has significantly improved post-lockdown, and now we’ve had the vaccine arrive as well,” he said.
Mr Berry described this change in consumer preference as a wake-up call for the market.
“In Australia, we’ve already gone beyond ‘COVID-normal’, and the market transition triggered by news of an effective vaccine is only just getting started.
“There has been some debate about whether the shift towards working and shopping from home will be permanent, and how this will affect companies – in particular, listed real estate trusts in the office and retail sectors,” Mr Berry said.
“However, looking back to the years immediately following the Spanish flu pandemic, there was huge pent-up demand which resulted in the consumerism and exuberance of the Roaring Twenties,” he concluded.
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