In January 2020 Australian market increased 4.9%, in the second best market performance out of 48 developed and emerging equity markets around the world. This was largely due to large Australian growth and defensive stocks finding support in the face of new economic uncertainty. US ten year bond yields fell over 20% during the month, back to levels seen last August as markets feared that global growth will slow following the outbreak of coronavirus. In this environment Defensives outperformed including Healthcare stocks (that continued to be the largest contributor to market returns) along with stocks leveraged to lower bond yields such as infrastructure and REITS. Cyclicals and value oriented names underperformed during the month. “Dr Copper” the industrial metal that most closely tracks global economic growth perceptions fell more than 10% and had a14 day losing streak from mid-January, its longest losing streak in three decades.
The Fund’s top 10 overweight positions currently have a weighted average PE of 19.7x versus the Fund’s top 10 underweight stocks at a weighted average PE of 27.3x. The largest underweight positions include CSL Limited, Transurban, Newcrest, Aristrocratand Westpac. Most of these businesses have attributes that are stable or growing but have also been well recognized and hence trade at significant valuation premiums.
See attached for full report which includes our current view on CSL and Transurban.
Emma McCarthy recently joined Ethical Partners. Emma is a passionate final year law student and joins us as Sustainability and Advocacy Assistant. We are honoured to share with you her reflections on the recent UN Global Compact conference, and how it inspired her, as a new recruit to the global sustainability and human rights community, on her journey to fight for change.
During August 2020 the Fund returned 4.10% versus the S&P/ASX 300 Accumulation Index of 3.05%, outperforming by 1.05% (after fees). Overweight positions in Consumer Staples and Industrials added to performance while stocks in General Insurance and Building Products detracted from performance.
It appears that the Australian economy will be asked to grow itself out of debt post COVID rather than experience an increase in taxes once the economy is more stable. So what are the long term projects that would change Australia for the better? It was quite timely indeed then that the Australian Energy Market Operator (AEMO) recently released its 2020 Integrated System Plan (ISP). It appears to us that AEMO has put down the framework for how Australia will operate with less coal fired electricity generation given we have an aging fleet which will be gradually de-commissioned over the next 20 years.The AEMO Plan is a whole of system blueprint for the evolution and change the electricity market will experience in the 20 years to 2040. It expects 63% of the current coal fired power stations to close by then based on company disclosures and end of life assumptions. Herein lies Australia's great stimulus opportunity.
The last quarter has been the best of times for unprofitable but growing companies and the worst of times for value managers and others trying to buy equities with any margin of safety. Speculative activity in markets has been driven by excess central bank liquidity and real yields moving to -100bps, pushing risk assets higher, the valuations of technology companies up to levels not seen before and gold to all-time highs at around $2,000 USD per ounce.