ANZ Private Banking & Advice (PB&A) Head of Portfolio Implementation, Brian Ingham recently hosted a call with Yarra Capital Management (YCM) Managing Director and Head of Australian Equities, Dion Hershan and DWS CIO APAC and Head of Emerging Markets Equities, Sean Taylor to share their views on the global risks and what could lie ahead for markets in 2020. Also joining the discussion was ANZ PB&A Head of Portfolio Management, Dan Simpson.
Cautiously optimistic for a recovery in 2021
In a wide ranging presentation Simpson spoke to the recent volatility in markets, which have been largely driven by investor sentiment on the back of ‘news headlines’ and provided an update on the ANZ PB&A House View for the near-to-medium term.
Simpson touched on three key points which have helped drive the market recovery to date:
- The relative pace of reopening by some economies following the apparent stabilisation of infection rates across Australia, New Zealand and much of Europe.
- The quantum of monetary and fiscal stimulus packages deployed simultaneously across the globe.
- Data indicating that many of the world’s major economies reached their low-point in April.
Despite this positive news, Simpson notes ANZ remains cautiously optimistic for a medium to long term recovery, citing five key risks to a market recovery in the short term:
- The United States, where COVID-19 remains largely uncontrolled and susceptible to further waves of infection.
- The rate of new daily infections across much of the undeveloped world.
- Earnings forecasts - which remain either significantly downgraded, withdrawn or not provided - leading to significant uncertainty.
- US-China trade tensions.
- Very high levels of unemployment globally, which are expected to take some time to abate.
ANZ believes further market sell-offs are likely prior to a more sustained recovery sometime in 2021. Given our concern for near-term downside risks we remain marginally underweight growth assets within our diversified discretionary portfolios, with a mild preference for cash and global bonds.
Despite this mild preference for bonds we are cognisant of the low yield on offer from the asset class and continue to manage portfolios with an awareness of transaction costs and tax consequences.
Alphabet recoveries and rebounding into a recession
Continuing on the theme of recent volatility, Hershan was candid when describing markets as “the most chaotic I’ve seen in the last 20 years”, surprised by both the magnitude of the initial drop and subsequent speed of the recovery to date.
Hershan cautions against confusing “markets” with “economies”, citing markets’ perpetual eagerness to overreact, the 40% fall in the ASX in March - the fastest bear market in Australian history - as an example.
Hershan spoke to the relative strength of the Australian economy entering the pandemic - despite the catastrophic bushfires which ravaged the country in early 2020 - with both corporate and government balance sheets in a sound position from which to launch an aggressive counter-attack in the form of fiscal and monetary stimulus.
As a result of these actions, Hershan believes Australia has avoided the worst-case scenario for unemployment of 20-25%, with a more acceptable, albeit staggering 8-10% outcome likely.
Like the initial fall in markets in March, Hershan sees an economic path to recovery tied closely to a continued containment of COVID-19 numbers and subsequent reopening of the broader economy. He believes positive data flow in the months ahead, owing largely to our “island” state and ability to quickly close borders, should result in the Australian economy continuing its recovery.
On the shape of the recovery, Hershan spoke in jest about the number of letters in the alphabet used to describe the potential timeline back to normality. Rather than a typical V shaped recovery, Hershan described the likely outcome as an “impaired V”, shaped by an abrupt fall and recovery - the difference being the recovery is expected to be “incomplete”. YCM is forecasting Australia returning to an economy which sits 3-6% below its 2019 precipice. In short, Australia is seen to be rebounding into a recession, something which Hershan says has profound implications for domestic corporate earnings.
Hershan sees volatile months ahead for the share market but points to the potential resilience of the Australian economy relative to other major developed economies. YCM maintains a home bias towards Australian shares and believes the current economic climate should present an opportune time for active management to outperform passive management. Given the lift of the broader market in recent months and the earnings challenges faced by corporate Australia in the months ahead, now is when stock-pickers could prove their value. As Hershan describes it, “the best opportunities are inside the market, rather than the market”.
Forecasting a moving feast…
Taylor describes the ability to forecast the economic recovery as extremely difficult given the “moving feast” which is still occurring globally. Echoing the views of Simpson and Hershan, Taylor sees the containment of the virus, and subsequent unlocking of economies, as the key to any recovery.
He pointed to the disparity across nations globally where infection rates remain elevated in the US and parts of Europe and continue to rise in many emerging market economies. This is in contrast to Australia and much of Asia, where containment has been swift due to hard border closures and strict lockdown measures.
Despite the difficulty in forecasting, DWS believes the downturn has formed a base globally, expecting a -3% GDP decline worldwide in 2020. Across the major economies growth forecasts vary considerably; the US (-6%), Europe (-8%) and Japan (-6%) are all anticipated to have considerable contractions, while China (+1%) and emerging markets (-1%)- propped up by North Asia - should fare much better.
DWS views the greatest risk to any forecasts to be a secondary wave of infections, resulting in further lockdowns. Taylor notes additional outbreaks are very likely, but it will be the ability of countries to curtail flare-ups expediently which will dictate any adjustments to growth forecasts.
Alongside this, any re-escalation of the Sino-US trade war carries considerable risks. Whilst presently bubbling away, Taylor believes tensions could come to a boiling point in the final quarter of 2020 as the US election nears - what level this reaches will likely be dictated by US President Trump’s standing with the American public. Taylor explains how Trump has successfully managed to unite bipartisan support against China and should his popularity be waning ahead of the election this may be a platform from which he props up his campaign.
Unlike the US, Taylor isn’t as concerned by recent stoushes between Australian and Chinese diplomats, citing the reliance Australia and China have on one another across resources, education and agriculture as being too critical for both nations’ fortunes to continue longer-term.
When quizzed by Ingham on the outlook for China, Taylor - an expert on China and emerging market economies - pointed to positive domestic signals from the country, where PMI, traffic and hospitality data has picked up considerably and appears to be nearing pre-COVID levels. The current lack of global demand for Chinese goods however remains of concern to Taylor.
Despite this, North Asia (similar to Australia), has had a shallower hit to its economies even without the same level of fiscal stimulus seen across Europe and the US. The lack of Chinese fiscal stimulus is two-fold, according to Taylor. Firstly, because it is simply not required. Taylor notes higher forecasts from China relative to other major economies, including assumptions the nation will reach pre-COVID GDP by October - DWS is slightly less bullish on this timeframe. Secondly, lessons learnt from the Global Financial Crisis, where China initially overstimulated its economy, leading to a requirement to deleverage in subsequent years.
Around the grounds
The call was rounded out by a panel discussion on the value vs. growth divergence, technology and banking stocks and current portfolio positioning.
Given recent volatility, it’s natural to have concerns about investing. At ANZ Private we believe diversification, professional portfolio management and a longer term investment strategy are critical.
Discretionary portfolio management allows your portfolio manager to make decisions on your behalf in a time-efficient manner according to your selected risk profile. To find out more about this and how we may be able to assist you with your investment and advice needs, please speak to your ANZ Private Advisor.