Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 366

Welcome to Firstlinks Edition 366

  •   15 July 2020
  •      
  •   

Weekend market update. Global markets delivered a strong week with Australia up 1.9% and the US 1.2%. The S&P500 was slightly up on Friday and NASDAQ hung on to recent gains as the market balances worsening new virus cases with hopes of a vaccine. Signs of a V-shaped recovery in China and a softening of Trump's trade antagonism were also encouraging. 

***

The ways we think about investing are guided by several foundational texts published decades ago. One classic still read by students of markets is Security Analysis, continuously published for almost 90 years with the latest edition carrying a foreword by Warren Buffett. Although written by Benjamin Graham and David Dodd in 1934, much of it rings true now as markets remain subject to human behaviours that change little over time. Consider how this reflects the current stock market:

"Instead of judging the market price by established standards of value, the new era based its standards of value upon the market price. Hence, all upper limits disappeared, not only upon the price at which a stock could sell, but even upon the price at which it would deserve to sell."

With COVID-19 driving big winners and losers, the US market has taken on unusual characteristics. The S&P500 is now at its most concentrated for 50 years, with the Top 5 companies at 25% of the index and the Top 20 at 40%. Yet the 10th largest company in the US, as shown below, is Tesla, which is not even in the S&P500 because it is not profitable enough to qualify. It's not considered a blue-chip despite its US$300+ billion market value, exceeding Proctor & Gamble, Mastercard, JP Morgan and Home Depot. Elon Musk doesn't care as his wealth has overtaken Warren Buffett.

As significant is the lack of any bank in the US Top 10, showing how successful the big tech stocks have been. Australia is not quite the same, although CSL is now our largest company and BHP is third as our banks have also struggled.

On the theme of markets at extreme levels, this week we check six popular charts often used by analysts to monitor financial conditions, and it's clear that the elastic is stretched. In Australia, the disconnect between stocks and the real economy shows in the high Price/Earnings ratio in the middle of a recession and a pandemic, a long way above the long-term average of about 15. Hamish Douglass of Magellan said this week:

"It isn’t unusual during an extended crisis for markets to bounce strongly followed by a second sharp sell off. While we do not know how things will play out, investors should be prepared for a wide range of potential outcomes in the next 12 months. There is a real possibility of a collapse in equity markets, just as there is for a continued grind higher in equities supported by low interest rates."

Nobody knows how much of the early release of superannuation is finding its way into the stock market, but requests have reached $23 billion from 2.5 million applications. No doubt many people need the money but that's a lot of people with compromised retirement savings. Hopefully, they have their paperwork sorted as some people who qualified in April or May may no longer be eligible for the second round if they have returned to work.

Also this week, Hamish Tadgell describes how his investing has changed during the pandemic, and he reveals the companies best able to withstand the current storm. Then Will Baylis looks at income investing under these new circumstances, and explains a 'dual technique' in analysing stocks.

Kevin Davies was a member of David Murray's Financial System Inquiry, and he has identified a product which is not suitable for retail investors but ASIC seems unable to regulate.

Many people do not recognise that Australia has two main exchanges, not only the ASX but also Chi-X, a new sponsor of Firstlinks. As an introduction, Shane Miller describes how they selected the most recent additions to their TraCR range, which facilitates purchases of leading US companies on local exchanges.

Gold ETFs are experiencing record inflows (see the BetaShares ETF Report below) as investors focus on possible currency debasement due to limitless money printing. Michael Armitage says another benefit of investing in unhedged gold is its uncorrelated returns versus stock markets in times of stress.

As many of our readers manage their own SMSF, it's always good to read an update on rule changes, and Graeme Colley summarises some old and new rules in operation from 1 July 2020.

This week's White Paper is the BetaShares ETF Half Year 2020 Review of a sector which continues to prosper regardless of market conditions.

Finally, two bonus articles for the weekend. Michael Collins shows how China could soon become the world's leading consumer, while Russel Pillemer argues there is a future for global LICs by focussing more on fully franked dividends.

Graham Hand, Managing Editor

Latest updates

PDF version of Firstlinks Newsletter

Australian ETF June 2020 and Half-year Review from BetaShares

ASX Listed Bond and Hybrid rate sheet from NAB/nabtrade

Monthly market update on listed bonds and hybrids from ASX

Indicative Listed Investment Company (LIC) NTA Report from Bell Potter

Plus updates and announcements on the Sponsor Noticeboard on our website

 


 

Leave a Comment:

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Super crosses the retirement Rubicon

Australia's superannuation system faces a 'Rubicon' moment, a turning point where the focus is shifting from accumulation phase to retirement readiness, but unfortunately, many funds are not rising to the challenge.

Latest Updates

Investment strategies

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Superannuation

Meg on SMSFs: Indexation of Division 296 tax isn't enough

Labor is reviewing the $3 million super tax's most contentious aspects: lack of indexation and the tax on unrealised gains. Those fighting for change shouldn’t just settle for indexation of the threshold.

Shares

Will ASX dividends rise over the next 12 months?

Market forecasts for ASX dividend yields are at a 30-year low amid fears about the economy and the capacity for banks and resource companies to pay higher dividends. This pessimism seems overdone.

Shares

Expensive market valuations may make sense

World share markets seem toppy at first glance, though digging deeper reveals important nuances. While the top 2% of stocks are pricey, they're also growing faster, and the remaining 98% are inexpensive versus history.

Fixed interest

The end of the strong US dollar cycle

The US dollar’s overvaluation, weaker fundamentals, and crowded positioning point to further downside. Diversifying into non-US equities and emerging market debt may offer opportunities for global investors.

Investment strategies

Today’s case for floating rate notes

Market volatility and uncertainty in 2025 prompt the need for a diversified portfolio. Floating Rate Notes offer stability, income, and protection against interest rate risks, making them a valuable investment option.

Strategy

Breaking down recent footy finals by the numbers

In a first, 2025 saw AFL and NRL minor premiers both go out in straight sets. AFL data suggests the pre-finals bye is weakening the stranglehold of top-4 sides more than ever before.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.