Numerous rate cuts from the Reserve Bank of Australia, the implimentation of yield curve control and a $100 billion quantiative easing program, coupled with strong fiscal support from the Australian government as laid the groundwork for a strong rebound, particularly in domestic cyclicals.
The local sharemarket has lagged in the recovery through most of the year, as index-heavy value stocks suffered through the downturn while the high-flying tech stocks soared.
Banks, miners and energy stocks account for 51.2 per cent on the S&P/ASX 200 Index while the resilient tech sector accounts for just 4.1 per cent.
In the US however, tech accounts for 27 per cent of the S&P 500 with the banks, energy stocks and mining accounting for just 15.8 per cent.
Since November 1, the S&P 500 has risen 5.8 per cent in Australian dollar terms.
Australia’s suppression of COVID means its domestic cyclicals are now in a better position to recover than almost all its global peers.
“It’s about things going back to normal. It’s that the opening up story,” said Lazard Asset Management portfolio manager Aaron Binsted.
He said the extreme valuation dispersion between technology stocks and the cyclical stocks most downbeat by the pandemic had also played a role in the Australian market outperforming.
“That dispersion got more extreme than during the [early 2000s] tech boom,” he said.
“We saw the same thing then and when that tech bubble burst, it lasted for about three to five years. That dispersion is the bigger picture and maybe the vaccine was the catalyst for [a prolonged downturn in tech].”
Longlead Capital Partners’ Tim Campbell. James Brickwood
The suppression of COVID-19 across the region has meant global institutional investors have pushed money into Asia, tipping its recovery will be quicker than the rest of the world.
“Asia in aggregate has clearly navigated COVID well and the domestic side of the economy is really snapping back,” said Tim Campbell, co-founder and chief investment officer of Longlead Capital Partners.
“As a firm, we are seeing very strong interest from institutional investors, superannuation funds and sophisticated investors, looking to increase their overall allocation to the Pan-Asian region.”
While demand for increased exposure to Asia has been strong, the Australian sharemarket has vastly outperformed its Asian peers.
This month, Hong Kong’s Hang Seng is up 5.9 per cent, Japan’s TOPIX has risen 8.8 per cent and the Shanghai Composite has climbed 1.3 per cent, in Aussie dollar terms, well below the S&P/ASX 200’s 11.7 per cent gain.
Australia’s suppression of COVID-19 has been particularly strong and sets up the domestic to get an early lead of the global rebound likely when a vaccine arrives, with at least 40 per cent of the global population set to be immunised within a year.
“UBS say by the end of 2021, well be at de facto herd immunity when you add in people who have already had the virus,” said Mr Binsted.
“They Moderna and Pfizer vaccines will be given to another 15 per cent of the global population and AstraZeneca will add another 24 per cent.”
A deteriorating relationship with Beijing remains a key risk to the Australian sharemarket’s outperformance, particularly with the major iron ore miners lifting the market as they benefit from strong buying activity from China.
President Xi Jinping’s China is increasingly taking a more belligerent stance in its relationship with Australia. AP
“China has recently imposed various tariffs on Australian exports, while the long-term risk is that Chinese businesses will be wary of investing in Australia because of ongoing political uncertainty that could jeopardise their interests,” said Citi senior economist Faraz Syed.
“Theres also increased uncertainty for Australian exporters, especially for those where China is the largest market. Burgeoning commodity exports to China in recent times has allowed Australia to run trade surpluses.
“But Australias heavy reliance on Chinathe largest export destinationwill pose a downside risk to the outlook if trade sanctions continue to persist.”
Citi said in a downside scenario, exports to China could drop by 50 per cent, with iron ore caught in the cross fire, pushing the Australian dollar 16¢ lower compared to where it would otherwise trade.
Those odds are slim however, with Australia meeting 50 per cent of China’s iron ore demand and Brazil’s ore has been dogged by supply issues.
The strength of the Australian economic recovery story has pushed the Aussie dollar close to a two-year high, driven also by a mix of strength in industrial commodity prices and a weaker US dollar.
In the absence of increased tensions with China, the Aussie is likely to keep rising, a move could derail offshore earners although the strength of the domestic earners is likely to offset that weakness.
“It probably means companies something like CSL or ResMed, or a James Hardie and an Aristocrat, there’s probably some conversion headwind there,” said Mr Lockton.
“But we suspect the topline revenue and earnings growth in the market, which are firmly in the recovery bucket, swamps any Aussie dollar headwind.”
The strong economic rebound is particularly good news for real estate investment trusts (REITs), which have suffered heavily through the pandemic, as offices and retailers closed down in favour of working-from-home and online shopping.
“Weve added REITs [to the portfolio] which is more about the normalisation of the economy,” said Lazard’s Mr Binsted.
“Generally we were not in the REITs but they got absolutely belted by COVID-19 and were then pricing in big discounts to NTA (net tangible assets) so weve added GPT Group and more recently added Vicinity Centres too.”