Dermot Ryan
We are charged with generating income for our clients and we think now is a crucial time for clients to reassess where their portfolios are positioned in the high-income area of Australian equities.
It was only in March that, some days, local markets would be down by 8-10 per cent on the market open, following some difficult overnight moves in the US. Now, markets are trending upwards, and we are around bull territory (+20%) compared to the bottom we saw about five weeks ago. This is a reminder that humanity has, and will, continue to prevail. It also reaffirms the old adage: “buy to the sound of cannons.” Though there is much that is unfamiliar – physical distancing and isolation especially – markets will be markets, and they always turn. We believe investors in the market at the point of recovery are best placed to capitalise.
As I explained in a recent podcast with market analyst at CommSec, Tom Piotrowski1, we’ve been rotating through markets over the last few weeks, as we can now see some value return to domestic markets. Some examples of the moves we’ve made, and the strategies behind them, can serve to assist investors who take a long-term view to generating income.
For context, in the February reporting season just before the COVID19 lockdown, we saw lacklustre performance for profits at an aggregate level and a tepid economy hit by bushfire disruption. Because of that, we were already positioned in what we saw as defensive stocks in industries like utilities, infrastructure, and supermarkets. We continue to believe there are good dividends to be had in essential services, but there are some very interesting opportunities turning up in the volatility.
As the market crashed, we began to rotate into more cyclical sectors, and took part in a number of capital raisings, even in some cases buying stocks that had been cut to zero but had the potential to be strong payers in normal times. As I said, we are charged with generating income for our clients, and in our view those companies were making prudent moves to bounce back, ultimately rewarding their investors. As always, we focus on the fundamentals: good management, strong balance sheets, and the ability to trade through a severe revenue disruption.
Hard to believe as it might seem, there are also some sectors that are relatively unaffected by the COVID-19 disruption. We believe dividends are very likely in some infrastructure sectors, like pipelines and transmissions, because they continue to experience normal functioning.
As I’ve said before, we think the banks are having a tough time, which is not surprising given they are not currently in a position where they’re generating a huge amount of organic capital. We forecast that aggregate dividends would be down by over a half and we have seen that come through since. In saying that, it’s important to remember that this won’t be forever either, and that Australian banks are moving into this crisis in a stronger capital position than they were during the Global Financial Crisis.
Further, Australia should be able to reopen quicker than most overseas companies. We’re not out of the woods yet, but Australia is in an enviable position on the global stage. We are among the top countries in the world for infection control , which forms part of the reason why we think domestically focused stocks will do well in the rebound. Some turning points we will be monitoring include how quickly state governments foster a return to regular activities, as a starting point. Other things we are monitoring for signs of a pick-up in local markets include spikes in domestic tourism and credit card expenditure.
For pre-retirees and retirees, this is of course a deeply stressful period. Hopefully there is comfort in knowing that already, the end is in sight, there are options on the table, and that markets have always recovered. Even with the temporary cuts to dividends, Aussie equities are still topping the table of income options for domestic investors and we believe they have the potential to grow capital over the long term. We also stand by our view that being properly diversified and set for the next cycle is a key part of being ready to capitalise on opportunity.
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https://www.youtube.com/watch?v=BHX6UaYQYok
Author: Dermot Ryan, Co-Portfolio Manager (Income), Sydney Australia
Source: AMP Capital 8 May 2020
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