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Domestic reporting season provides more questions than answers

 

HOUSE VIEW

10 September 2021

 

Investors focused on two key events in August; the Jackson Hole symposium and the Australian reporting season.
Our Chief Investment Office provides a brief summary of both and outlines why it has decided to remain mildly overweight growth assets.

Our view

As a Chief Investment Office, we watched two events closely in late August; the Jackson Hole symposium and the Australian reporting season - the latter continuing into early September.

Firstly though, the former. Throughout the pandemic, a key driver of markets has been how investors perceive the reaction function of central banks - in particular the Federal Reserve (Fed) - to economic data.  Over the course of the northern hemisphere summer, market participants have been persistently wary of stronger economic growth leading to an accelerated withdrawal of economic stimulus. This led to good data points triggering instability across equity and bond markets, and conversely bad data points a quick rally. Central banks were, and continue to be, very aware of this current obsession by investors.

Cue the much anticipated Jackson Hole symposium - historically used by Fed policy makers to communicate important monetary policy changes - and what many market analysts thought to be a major event for markets, proved anything but. The Fed walked a very thin line in order to avoid any market disruptions, using careful communication to disentangle the expected tapering decision from rate hikes.

Now to the latter - the domestic reporting season - which delivered surprisingly robust results, but perhaps managed to provide more questions than answers. Positives were abundant; roughly 70% of companies met or exceeded expectations, overall earnings rose approximately 35% across the ASX 300, earnings per share expectations are now 50% higher than their pandemic lows and dividend expectations sit close to 60% above their nadir. Regarding announcements on capital returns, it’s worth highlighting that dividends and share buybacks declared during this reporting season are expected to push close to AUD38b back into investors’ pockets over the next few months - an all-time high and well above the previous record of AUD29b in 2019.

 

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ASX 300 – DIVIDEND PER SHARE FORECAST


Graph showing negative real yields allow for high multiples

Sources: Bloomberg, ANZ CIO as at August 2021

ASX 300 – EARNINGS PER SHARE FORECAST


Graph showing negative real yields allow for high multiples

Sources: Bloomberg, ANZ CIO as at August 2021

On the downside, approximately 60% of companies didn’t provide any form of guidance for 2022 - understandable given the lengthy lockdowns across the east coast of Australia. However, compounding this were concerning comments about expected supply chain disruptions and cost frictions in 2022. Add to the mix recently declining iron ore prices, driven by falls in Chinese steel production, and some investors are right to feel a little nervous. The local index has now risen for 15 of the past 16 months including the past 11 consecutively. While the old adage, “what goes up must come down”, may be ringing in some investors ears, it’s worthwhile noting that despite the Australian share market rising 74% since plumbing a seven-year low in March last year, valuations are yet to reach extreme levels thanks to the strength of company earnings.

What this means for our diversified portfolios

Australia continues to be hampered by lockdowns and the Delta variant of COVID-19 is wreaking havoc across various regions in the southern hemisphere. However, on the other side of the globe most economies are now open for business and this should lead to a continued feel good factor in markets, at least for the time being.  The business cycle remains robust and ample liquidity in markets provides reason enough to hold our mild overweight to growth assets for a bit longer. 

Last month we flagged the possibility of increasing our exposure to the domestic share market if the ‘value trade’ gathered further steam. While positive towards Australian shares in the medium-term, the current uncertainty surrounding our local economy outweighs the potential opportunity at this point. We remain at benchmark to Australian shares as a result.

ANZ investment strategy positions - September

Investment position
Asset class Reasoning
Growth Assets

 

Developed market equities

Developed market equites - where we are mildly overweight - remain our preferred asset class within growth assets. Despite some risks increasing at the margin and US growth forecasts being downgraded slightly we remain positive on the short-to-medium term outlook for global equities.

Relative equity preferences continue to be a derivative of the interest rate view, so our expectation of higher yields continues to translate into a preference for value. Given some further dark clouds are presenting on the horizon, we aim for a somewhat balanced approach within the portfolio instead, with quality/growth represented by the U.S and cyclical/value exposure via Europe and Japan.

Australian equities

As the Australian reporting season draws to a close it’s worthwhile reflecting on what were perhaps surprisingly robust numbers. Earnings for the ASX 300 have risen by approximately 30% Year-On-Year. Alongside this, earnings per share expectations have risen by close to 50% from their COVID-19 lows, which similar to global shares, has been one of the main supports for the local equity market in 2021. Dividend expectations have also risen by close to 60% over the same period.

Despite the positive outcomes, the outlook for 2022 now looks more challenging. The lengthy and continuing lockdowns across New South Wales and Victoria meant, roughly, only 40% of companies provided any form of guidance for 2022. Concerning comments about supply chain problems and cost frictions were a key theme reiterated by many companies, and furthermore, declining iron ore prices (driven by falls in Chinese steel production) could hinder future profits for resource companies. On a more positive note for 2022, capital management was constructive in 2021 and is likely to remain a key focus for companies in 2022.

While the possibility of higher yields provides the potential for further upside for the domestic share market, the above headwinds have meant we hold our benchmark position to the asset class at this time. 

Emerging-market equities

We retain our benchmark position in emerging markets equities this month with a preference for developed markets exposure at this time. Emerging markets vaccination rates continue to lag their developed market peers, representing a possible downside risk for the asset class. Additionally, regulatory risk within China (which is approximately 40% of the index) is hard to judge.

We have recently downgraded growth prospects for emerging markets, however, if GDP and earnings growth forecasts vs. developed markets start to turn positive then it could be time to consider building a more meaningful position. 

Listed real assets

Our mild underweight position to listed real assets remains. The tactical position is a construct of a mild underweight position in listed infrastructure and benchmark positioning to Global REITs (GREITs).

Despite underperforming global equities during August, GREITs remain ahead on a 12-month basis and while outperformance has made the asset class less attractive on a relative basis, we maintain our position due to the attractive dividend yield, diversifying effect for multi asset portfolios and hedge against inflation.

Strategic opportunities to build our position in listed infrastructure could present in the medium-term given the lower for longer rates scenario and potential fiscal support via additional infrastructure spending, however, we retain our mild underweight to listed infrastructure for the time-being, with a current preference for equities and GREITS. 

Foreign Exchange Hedge Ratio*

We maintain a neutral position to the AUD within portfolios - albeit marginally below benchmark - preferring more developed markets foreign currency exposure. In a risk-off event, this positioning should act as a form of downside protection for portfolios.

 
Defensive Assets

 

International fixed income

Although we are slightly more cautious towards the asset class there is no change to our global fixed income position this month. US real interest rates continue to appear too low and we closely watch yield movements with consideration given to decreasing our exposure should yields start to trend higher.

We continue to prefer global credit versus sovereign bonds given monetary policy support, the hunt for yield and broader economic prospects.

Australian fixed income

Last month we took Australian bonds from benchmark to underweight based on the expectation of yields trending higher - we retain this position in September. Alongside the expectation of higher yields there are two key factors which shape our current exposure to domestic bonds. Firstly, the Australian bond market is a higher beta market than many of its global counterparts and is therefore expected to underperform in the event of a broad based sell-off.  Secondly, we continue to favour credit relative to sovereign bonds and the domestic market has a much lower exposure than its global counterpart.

Cash

In recent months we have increased the cash in portfolios. We are now benchmark to the asset class which provides liquidity and risk reducing characteristics to portfolios.

 

Notes:

*Percentage of developed market and emerging market equities hedged from foreign currency into Australian dollars.

Tactical Asset Allocation is current as at 1 September 2021.

 

 

To discuss what this insight could mean for you, talk to your ANZ Private Banker directly, or contact us below

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