Quarterly Investment Commentary

Market Performance

Globally, share markets ended FY20 generating low returns, with some regions performing worse than others. US share markets had a volatile run in 2019, before rallying to all time high levels in February 2020 on the back of the US and China officially signing the first phase of a trade deal.

In March 2020, the World Health Organization declared Coronavirus a pandemic, triggering a mass sell-off of risk assets as investors feared a looming recession. Market pessimism was short-lived, as US and Australian equities rebounded sharply in April and May 2020, recouping most of the losses.

Share markets in Europe experienced deeper drawdowns, with the FTSE 100 and Stoxx Europe 600 closing the financial year down around -14% and -4% respectively. UK’s exit from the European Union (“Brexit”) remains an imminent risk as the region begins to re-open post Coronavirus containment measures.

The Australian share market (ASX 300) ended the year -7.6% lower, as the Coronavirus pandemic affected demand-sensitive stocks. Energy, Financials and Real Estate stocks were the largest detractors, declining -20% to -30% on average over the financial year. Conversely, Healthcare and Information Technology stocks benefited as pharmaceutical companies expedited clinical research for a vaccine and businesses transitioned to digital work-from-home arrangements.

Investments in diversified Property and Infrastructure portfolios delivered small negative to low positive returns over the financial year, providing diversification benefits during the months of heightened equity market volatility. Notwithstanding this, the Coronavirus pandemic has caused significant disruption to the operation of retail properties. Governments instructed the full closure of entertainment and large non-essential retail business, citing health and safety considerations. This had a severe impact on overall foot traffic at large infrastructure assets and sales at shopping centres and retail precincts.

Investments in Fixed Interest generated strong positive returns, as defensive assets performed particularly well in the stressed market environment. The Barclays Global Aggregate Index (local currency) generated more than 4% returns over the financial year. Traditional portfolio hedges such as government bonds and gold generated positive returns. US Treasuries are up around 9% and gold up 18% over the second half of the financial year.

Economic Overview

Despite equity markets pricing in a “V-shaped” recovery, economic reality has been relatively bleak as unemployment rates reached record highs and daily new infections regained momentum in the closing months of the financial year (particularly in US, India and Brazil).

The Coronavirus pandemic has threatened to permanently set back global GDP growth and triggered recessions in the US, Eurozone, Japan and Australia. China has been one of the few nations to post positive economic growth; albeit its lagging retail sector indicates there is still a long road to a full recovery.

Domestically, Australia is going through a tough phase and experiencing the largest economic contraction since the 1930s. Australia’s 29-year recession-free run came to an end in 2020 as the nation’s GDP declined 0.3% in the first three months of the year. Prime Minister Scott Morison announced a $259 billion economic stimulus, (approx. 13% of GDP), to support individuals, households and businesses.

The Reserve Bank of Australia reduced its cash rate target to a record low of 0.25% p.a. in its March 2020 meeting. They introduced a $90 billion funding facility for authorised deposit-taking institutions, supporting credit issuance to small and medium-sized businesses. The Westpac Bank Consumer Sentiment Index for Australia rose 24% in the closing months of the financial year as the economy slowly recovers from very low levels of activity.

Economic conditions in the Eurozone have improved drastically since the lowest point in April 2020 as the spread of the virus appears to have slowed. Purchasing Managers Index data shows that manufacturing activity recovered in the closing two months of the financial year.

The European Union established a €$750 billion (AUD $1.2 trillion) recovery fund to provide struggling countries (such as Italy and Spain) with financial support to lead recovery and prevent a rerun of the European Debt Crisis. Headline inflation in the Euro bloc remains low as the European Central Bank continues to purchase bonds to stimulate its economy.

US and China political tensions have soared amid the Coronavirus pandemic. The US alone has recorded 2.7 million cases (approximately 25% of total cases) and 130,000 deaths, with President Trump publicly holding China accountable for the pandemic. Bitter accusations between the world’s two largest economies extend beyond the handling of the Coronavirus outbreak, as the US places further sanctions on Chinese technology companies and increases its efforts to reduce the reliance of its supply chains on China.

The US has resorted to significant policy measures to counteract the impact of the virus on economic growth, with President Trump announcing a $2.3 trillion (AUD $3.5 trillion) stimulus package to support small businesses and provide unemployment benefits to impacted citizens. The stimulus coincided with the Federal Reserve reducing interest rates and launching a $700 billion (AUD $1 trillion) quantitative easing program to help kick start the economy.