Archive for category: News & Insights

US elections, daily pandemic updates, and political scandals are dominating the news headlines. In this world of hyper-connectivity and a constant flow of information, investors must be focused on their game plan and learn to tune out the noise of the crowd. As we witnessed during October’s grand final (AFL or NRL depending on your favoured code), discipline is the key to success.

Markets don’t like uncertainty. True to label in the current environment, markets have been range-trading as significant uncertainty surrounds the outcome of the US elections, as well as the size and scope of a US fiscal package, which requires an agreement with Congress. Add to this ongoing concerns over the pandemic, especially in the US and Europe, and the fraught process of reopening, which has seen mixed success globally.

Managing our portfolio through times like these calls for a solid game plan and the patience to see it through. We can’t afford to bank on one particular outcome (a strategy akin to flipping a coin). We must determine which part of our portfolio will provide protection and which part will allow us to capitalise on the upside and take advantage of potential growth.
Lonsec’s game plan is simple. In a low yield world, you need growth. We have retained our exposure to growth assets such as equities, especially as interest rates remain low and markets continue to be supported by liquidity from central banks. However, we are cognisant that there are risks in the market and therefore we have diversified our equity exposure to incorporate a mix of investment styles that can perform well in different market conditions.

We’re also consciously ensuring that we have exposure to some traditional defensive sectors and investment strategies that we expect to hold up better than the market should we experience a correction. Incorporating diversifying assets that can behave differently from equities and bonds is prudent. We have therefore incorporated alternative assets such as gold in some of our portfolios to bolster our defensive positioning.

Periods of uncertainty can provide opportunity as well as risks, and a dynamic approach is essential for managing both. We have invested in parts of the bond market where we identified significant mispricing opportunities, and we continue to have a positive view on emerging market equities, where we believe the additional potential returns warrant the risk.

As investors, we’re not just playing a single match, or even a single season—we’re playing for long-term success. Markets are unpredictable, but having the right strategy that takes into account a range of possible scenarios, including those that might seem unlikely to us today, will assist in generating more consistent outcomes over the long-term. We can’t win every game or every premiership, but we can increase our chances of accumulating some silverware over time.

IMPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research).  LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406. Please read the following before making any investment decision about any financial product mentioned in this document.

DISCLOSURE AT THE DATE OF PUBLICATION: Lonsec Research receives a fee from the relevant fund manager or product issuer(s) for researching financial products (using objective criteria) which may be referred to in this document. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services.  LIS receives a fee for providing the model portfolios to financial services organisations and professionals. LIS’ and Lonsec Research’s fees are not linked to the financial product rating(s) outcome or the inclusion of the financial product(s) in model portfolios. LIS and Lonsec Research and their representatives and/or their associates may hold any financial product(s) referred to in this document, but details of these holdings are not known to the Lonsec Research analyst(s).

WARNINGS: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness.  If the financial advice relates to the acquisition or possible acquisition of a particular financial product, the reader should obtain and consider the Investment Statement or the Product Disclosure Statement for each financial product before making any decision about whether to acquire the financial product.

DISCLAIMER: No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by LIS. The information contained in this document is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

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The Australian property securities market has seen most prices continue to recover during the September quarter 2020 as the reporting season was better than expected. However, the bifurcation between sub-sectors is similar to the global property securities markets. Industrial/Logistics, specialist, funds management, large format, and non-discretionary retail sectors have outperformed in calendar 2020. Discretionary retail and office sectors underperformed.

The Retail sector has had to deal with forced store closures (excluding supermarkets and essential provisions), with the Melbourne metropolitan region still under lockdown restrictions. The government mandated Leasing Code of Conduct has shared the pain of reduced revenues for eligible small-to-medium enterprises, although some larger retailers have been attempting to withhold rents and renegotiate based on a revenue-linked model.

Overall, rent collections in retail have been around 55% for the June 2020 quarter, with dividends cut or omitted by the likes of Scentre Group. Retail rents for discretionary stores are likely to continue to come under pressure. In contrast, non-discretionary retail centres anchored by supermarkets have traded strongly, as have large format centres with Bunnings Hardware, Officeworks, and JB Hi-Fi as tenants. Property valuations of the latter have remained firm, while discretionary mall valuations have fallen.

The Office sector has continued to collect a high level of rents and valuations have seen limited reductions given the level of local investor interest in high quality Australian property (albeit international interest is more subdued given that travel is not possible for inspections). Medical and tech-related space is also well sought after by smaller investors. However, rental incentives are rising and sub-lease space in Sydney and Melbourne has grown by 100,000 square metres.

The Industrial/Logistics sector has been led by Goodman Group, with a strong FY20 earnings result and reaffirmed positive outlook based on its global development pipeline and recurring funds management fees. In Australia, logistics developments are expanding to cater for the ongoing shift to online networks with some vacancy increase on the east coast.

The Residential sector has received significant government support from the JobKeeper and JobSeeker programs and other incentives by various state governments. Further easing of lending criteria by APRA, in addition to loan repayment deferrals by the major banks, has lent support during the pandemic period. However, these measures are scheduled to unwind over the next six months (excluding the $25,000 Homebuilder program and easier lending requirements), which is likely to expose the residential sector to high unemployment. While Australia’s international in-bound travel is severely limited, migration numbers will be down significantly relative to previous years and the outlook for new residential property sales from this source is likely to be subdued.

Several Australian REITs (A-REITs) had capital raisings during 2020, so balance sheets are well-positioned with average gearing around 27%. At the same time the cost of debt has reduced with interest costs for new debt down from around 3.0–3.5% to 2.0–2.5% over the last year.

Pricing in the A-REIT sector has Industrial/Logistics (+71%), Hardware (+33%), and Service Centres (+13%) at premiums to net asset values (NAV). Sectors at a discount to NAV are Office (-17%) and Retail, although discretionary malls are at -54%, but non-discretionary centres at a 1.0% premium. Capitalisation rates have reduced over recent years and have now started to ease (for retail discretionary) or steady out (for office) but remain firm for Industrial/Logistics and Specialties (including Hardware).

Lonsec believes the Australian real estate market, which was already late in the cycle pre-COVID, has extended its late-stage duration as a result of ‘lower-for-longer’ monetary policies. Despite deferrals and cancellations of dividends by some REITs, Australian property securities still offer attractive yields relative to both bonds and cash (holding at a 3.0–4.0% yield differential). Sectors with structural tailwinds (logistics, industrial, and specialised) are expected to enjoy more resilient cashflows and distributions, and as a result will continue to trade at a premium. Until the COVID-19 pandemic is brought under control, the way forward remains unclear. However, value investors will be tempted to look at heavily sold-off sectors at some stage.

Issued by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec). Warning: Past performance is not a reliable indicator of future performance. Any advice is General Advice without considering the objectives, financial situation and needs of any person. Before making a decision read the PDS and consider your financial circumstances or seek personal advice. Disclaimer: Lonsec gives no warranty of accuracy or completeness of information in this document, which is compiled from information from public and third-party sources. Opinions are reasonably held by Lonsec at compilation. Lonsec assumes no obligation to update this document after publication. Except for liability which can’t be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the document or any information. ©2020 Lonsec. All rights reserved. This report may also contain third party material that is subject to copyright. To the extent that copyright subsists in a third party it remains with the original owner and permission may be required to reuse the material. Any unauthorised reproduction of this information is prohibited. 

The shockwaves caused by the COVID-19 pandemic are still being felt across the economy with extreme readings observed across various economic indicators over the June and September quarters. These include a spike in the unemployment rate to 7.5%, a 7.0% decline in GDP, and a 12% decline in household spending over the June quarter. In this article we look at some of these historic fluctuations and discuss the likely path to recovery.

Households

Household income rose 2.2% over the June quarter despite a 10% fall in hours worked, driven by the increase in social assistance schemes and additional COVID-19 support payments including Jobkeeper. Household spending also declined 12% over the June quarter, reflecting significant changes in spending patterns of consumers due to COVID-19 restrictions around the country. Consumer spending patterns are expected to remain volatile for the remainder of the year, particularly across the services and goods categories.

Household spending

Businesses

The COVID-19 pandemic has also had a significant impact on businesses with many industries recording declines in gross value added over the June quarter. Hospitality and tourism related industries have recorded the largest declines on record, with payroll data indicating a 15–20% decline in jobs in these sectors over the June quarter.

The mixed fortunes of various industries become more obvious when we look at retail sales data, which have also seen historic swings post March 2020. After an initial spike in March, retail sales fell 17.7% in April before showing a record monthly rise of 16.9% in May. The numbers have turned negative again in August, falling 4.0% over the month, driven by the Victorian lockdowns. Nonetheless, despite the extreme volatility experienced since March, overall retail sales are around 6% above the pre-COVID levels in February 2020. At the industry level, Food and Household goods retailing have grown strongly since March, while sales within the Cafes, Restaurants, Clothing and Footwear segments have recorded double digit declines over the period and continue to remain relatively weak into the December quarter.

Retail sales – seasonally adjusted % change

Online retail and e-commerce have also been a main beneficiary of recent events, with many online businesses seeing a huge influx of orders during the lockdowns. Following a large spike in online sales in March and April, the seasonally adjusted online sales figures rose 81.1% in August 2020 compared to August 2019, highlighting the shift to online shopping at the outset of the COVID-19 pandemic in Australia. While these elevated levels of sales activity are unlikely to continue post the lockdowns, COVID-19 has to some extent expedited the structural shift to online retail, a trend we expect will continue for some time given the relatively low penetration of online sales (around 10%) within retail sales in Australia.

Total online sales

International travel

No industry has been more impacted by the pandemic than tourism and international travel. Overseas arrivals have virtually ground to a halt since March 2020, a far cry from the 9.5 million annual visitors to Australia in the preceding year. This has in turn had a material impact on the local tourism industry, with the federal government indicating the industry is likely to lose $55 billion this year alone. This has forced a swath of companies into survival mode resulting in significant job losses across the sector.

To date, not all companies have been able to navigate the challenging environment. The likes of Virgin Australia and STA travel fell into administration in 2020, while companies like Qantas, Sydney Airport, Flight Centre, and Webjet have been forced to raise emergency funds via discounted equity raisings to survive.

Short term visitor arrivals

Unlike some of the other industries that are expected to experience a rather speedy recovery over the next 12 months, the recovery in international travel remains uncertain. The commentary we are seeing from the likes of Qantas and Sydney Airport indicate that international travel is unlikely to return to pre-COVID levels until 2024, implying a long and slow recovery for industry participants.

Outlook

The economic indicators discussed in this article provide a small snapshot of the severe impact of the COVID-19 pandemic on the local economy, with many indicators recording extreme fluctuations over the June and September quarters. This highlights the critical nature of the monetary and fiscal policy changes implemented by the RBA and the Federal Government to support the economy post March 2020.

Looking ahead, the path to recovery remains uncertain with some industries faring better than others. As such, we are likely to see further coordinated policy responses from the RBA and state and federal governments, most likely in the shape of further targeted stimulus and accommodative monetary policy options.

This information is provided by Lonsec Investment Solutions as a corporate authorised representative of Lonsec Research Pty Ltd who hold an AFSL number 421445. This is general advice, which doesn’t consider your personal circumstances. Consider these and always read the product disclosure statement or seek professional advice prior to making any decision about a financial product. You can access a copy of our financial services guide at lonsec.com.au

This video is provided by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research). LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406.

Past performance is not a reliable indicator of future performance. This is general advice, which doesn’t consider your personal circumstances. Consider these and always read the product disclosure statement or seek professional advice prior to making any decision about a financial product. While care has been taken to prepare the content of this video, LIS makes no representation or warranty to the accuracy or completeness of the information presented, which is drawn from public information not verified by LIS. The information contained in this video is current as at the date of publication.

Copyright © 2020 Lonsec Investment Solutions Pty Ltd ACN 608 837 583