The economic effects of Covid-19 have been masked with Government stimulus, Central Bank liquidity injections, policy changes and debt forgiveness or deferral. We note the following:
- Directors obligations diminished: through temporary amendments to the Corporations Act with respect to continuous disclosure (which potentially weakens having an informed market); a six month holiday on laws around insolvent trading; ATO reportedly deferring payment notices to companies.
- Capital raisings hastened: ASX listing rules changed to increase size and speed of raisings.
- RBA liquidity: to cap rates in the bond market and provision of cheap funding to banks.
- Industry:direct support for the property and building industry.
- One off superannuation withdrawals: ~ $15bn.
- JobKeeper:~ 3.5 million workers and $70bn in wages support.
- JobSeeker:~ 1 million people with increased benefits.
- Loan deferrals: ~ $230bn of loan deferrals from both business and households.
- Rent deferrals: residential and commercial tenants.
The above have led to a stock market environment that is currently assuming no lasting effects of the Covid-19 pandemic and instead puts a lot of faith in the above measures to see us through. But many of these measures are slated to come to an end in the fourth quarter of 2020 where we believe the cash flow impacts will manifest for households and business. Despite the implication from rising share prices that all is well, we believe there are some companies that will face cash flow issues.
See attached for the full report.
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.