Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 379

Welcome to Firstlinks Edition 379

  •   15 October 2020
  • 6
  •      
  •   

Weekend market update

A few months ago, the prospect of a Biden Presidential victory was supposed to be bad for stock markets, due to higher taxes and more regulations. But with Biden having a clear poll lead, the markets are now taking comfort from the expectation of more fiscal stimulus. Whatever the market does, we find a way to justify it after the event. Despite rising COVID cases worldwide (now 350,000 a day), the S&P/ASX200 finished the week up 1.2% to its highest level since March. On Friday, the tech NASDAQ in the US lost a little ground, down 0.4%, while the S&P500 was steady.   

***

It is trite and obvious to say the future is uncertain, and while COVID-19 brings extra risks, markets are always unpredictable. However, it's fair to argue that investing conditions are more difficult than ever, mainly because the defensive options for portfolios produce little income. Moving beyond cash, term deposits and investment-grade bonds introduces risk. In his latest memo to clients, Oaktree's Howard Marks says:

"In my view, the low interest rates represent the dominant characteristic of the current financial environment, creating the dominant consideration for investors: the lowest prospective returns in history ... when uncertainty is high, asset prices should be low, creating prospective returns that are compensatory. But because the Fed has set the rates so low, returns are just the opposite. Thus the odds aren't on the investor's side, and the market is vulnerable to negative surprises."

Overwhelmingly, low interest rates and ready liquidity are driving demand for other assets, and reconciling these values is our major focus this week. For example, at a time when office rents are facing downward forces and some sections of retail are facing online disruption, cap rates (that is, income divided by purchase price) on commercial property remain robust. The chart below shows that in the past, say from 1995 to 2010, cap rates were far less than double 10-year bonds. Now, with earning yields on commercial property at about 5.8% and bonds at 0.8%, the multiple is around seven times. Such returns sustain demand for property notwithstanding COVID.

Our articles start with veteran consultant to the superannuation industry, Don Ezra, who asks whether the rules of investing have changed. He takes us through seven logical steps to show where he has settled with his own retirement thinking.

Complementing this approach, in the White Paper section, Vanguard explains its 'Total Return Investing' concept. It ensures alignment with risk tolerances instead of taking unwanted market and credit exposure in the search for income.

(See also the exchanges on growth/defensive in my article on YourSuper last week which drew a strong response from Hostplus' CIO Sam Sicilia).

Then we have different perspectives on the major company successes of COVID-19, the tech stocks. There is no hint of a recession for the Amazons, Afterpays, Googles and Kogans of the world when they are enjoying such strong growth. Ashley Owen's charts to show how local and overseas tech stocks have performed in 2020. Then Benjamin Chong makes the case that, contrary to popular categorisation, many of the best tech stocks now have the defensive characterics investors crave. Even if Chong is correct, stock selection remains important. For example, Tesla is up 425% in 2020 versus the S&P500's 9%, with little in earnings updates but plenty of retail investors living the dream on the back of Elon Musk's hero status.

Returning to Howard Marks for a comment on this, surprisingly for someone who says investing opportunities are scarce, he says:

"Current profits severely understate the tech leaders' potential. They currently choose to spend aggressively on new product development to expand (market) share and head off competition, voluntarily suppressing margins. This enormous potential exists for tech companies to increase profit margins in the future ... For these reasons, a large differential in terms of P/E ratios is warranted."

But it's never obvious when valuations are too high. Trent Masters says it is incompatible to assume strong growth at the same time as low interest rates, and he provides worked examples of how this is inflating stock prices. And Michael Collins provides 10 reasons why low rates can actually be counterproductive for economic growth, including the 'liquidity trap'.

It's useful to remind ourselves when markets are at highs, there are plenty of stocks investors are wary about. ASIC produces data each week on the extent to which stocks are shorted, and Leisa Bell has extracted the Top 10 in Australia. There's a lot of hoping that prices of these stocks will fall.

As more Australian investors acquire global assets, Raewyn Williams detects a move from hedging currency exposure or taking a default 50/50 approach to using the risk as a source of added return.

And amid all this investing, we still have the rest of our lives to manage, including aged care for ourselves, parents or grandparents. Rachel Lane explains the latest developments from the Budget and Aged Care Royal Commission. We would all like to live happily and healthily in our own homes until we are tapped on the shoulder, but a more likely reality is declining health and later-life challenges.

It's also worth checking BetaShares ETF Report for September 2020 (in our Education Centre) with net flows exceeding $2 billion in a month for the first time, with the strongest demand for Australian equities. ETFs are at a record high of over $71 billion.

Finally, as the US Presidential election edges ever closer, expect Donald Trump to renew his rampant Twitter activity after a lull during his COVID treatment, sending those who watch them into a lather for the impact on the market. Here's his favourable and unfavourable stock market mentions plotted against the Dow Jones.

 

Graham Hand, Managing Editor

Latest updates

PDF version of Firstlinks Newsletter

Australian ETF 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

Monthly Investment Products update from ASX

Plus updates and announcements on the Sponsor Noticeboard on our website

 

6 Comments
Steve
October 18, 2020

Trafalgar Group Pollsters (who correctly predicted the 2016 Presidential Election result) state that Trump will win again, this time with 275 Electoral College votes. They have worked out how to poll the "silent" voter - not unlike how ScoMo won on the silent vote at the last Federal election.

Colin
October 16, 2020

Why can't they transfer stock holdings & individual values to the new watchlists? Now if I want to see what the total value of the portfolio is worth I have to bring out the calculator. What was wrong with the old site?

Tony Godeassi
October 15, 2020

Has anyone had a look at the new ASX website? I find it clunky, slow, and I cannot access the information I want as easily as on the old site. Now if I want a quick look at a stock as a new investment idea I will have to log into my broking account. Also is seems you have to set up an account and log in to get full access. I wonder how the ASX can justify this in terms of better market transparency? It seems to me the ASX is making access to announcements and other market data more difficult.

Simon
October 16, 2020

I agree - its much more difficult and slow to use than the old site

David M
October 18, 2020

I agree Tony. The new ASX site is awful. Thankfully they haven't wrecked the app yet so I would suggest downloading the ASX app and follow stocks etc and overall market.

Alan M
October 18, 2020

Totally agree. New one is totally disorientating & difficult to access quickly.

 

Leave a Comment:

     
banner

Most viewed in recent weeks

Have the rules of retirement investing changed?

In retirement, we still want to reduce stock volatility while generating cash flows. The two needs have not changed, but the reward expected in the old days from interest payments has gone. What should we do?

18 Aussie names for your watchlist

A Morningstar stock screener reveals a cross-section of companies with competitive advantages that are trading at material discounts to estimated value. This is a list of 18 highly-rated names worth watching.

Hamish Douglass on what really matters

Questions on the stock market/economy disconnect, how to focus long term, technology's growing role, income in a low-rate world, Modern Monetary Theory and endless debt and the tooth fairy.

Kate Howitt: investing lessons and avoiding the PIPO trade

Kate Howitt identifies the stocks she likes and the disappointments, gives context to the increasing role of retail investors, and explains why the market is more of a 'voting not weighing' machine than ever before.

Buffett and his warning about 'virtually certain' earnings

While many investors are happy to invest in any online companies, Warren Buffett focusses more on the quality of future growth, buying companies whose earnings are 'virtually certain' in 10 or 20 years from now.

Welcome to Firstlinks Edition 378

Budgets are forecasts, and more than most, Josh Frydenberg and Treasury waved a wet finger in the air in compiling the 2020 version. How many companies will now employ a new apprentice for $100 a week subsidy? Which back-of-the-envelope showed 3.5 million businesses would use the instant asset write off? And the $17.9 billion for super savings based on the YourSuper proposal is wishful thinking.

  • 8 October 2020

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 380

Former US Vice President Al Gore once told me he needed to raise only US$70,000 when he first ran for politics. Now Biden and Trump spend billions just on television advertising. Little wonder so many favours are owed after each election, and this time, it really matters. Plus investing insights from Kate Howitt, Hamish Douglass, Roger Montgomery, Phil Ruthven and Morningstar's top stock picks.

  • 22 October 2020
Interviews

Kate Howitt: investing lessons and avoiding the PIPO trade

Kate Howitt identifies the stocks she likes and the disappointments, gives context to the increasing role of retail investors, and explains why the market is more of a 'voting not weighing' machine than ever before.

Investment strategies

Hamish Douglass on what really matters

Questions on the stock market/economy disconnect, how to focus long term, technology's growing role, income in a low-rate world, Modern Monetary Theory and endless debt and the tooth fairy.

Investment strategies

Buffett and his warning about 'virtually certain' earnings

While many investors are happy to invest in any online companies, Warren Buffett focusses more on the quality of future growth, buying companies whose earnings are 'virtually certain' in 10 or 20 years from now.

Shares

18 Aussie names for your watchlist

A Morningstar stock screener reveals a cross-section of companies with competitive advantages that are trading at material discounts to estimated value. This is a list of 18 highly-rated names worth watching.

Economy

Are debt and its servicing cost serious worries?

The impact of the pandemic on Australia's debt and deficit has forced the government into borrowing on a scale unimaginable at the start of 2020. What are the implications, and what is even more important?

Investment strategies

Why not use options to protect your share portfolio?

Many investors ask why fund managers do not protect the portfolio downside by using options. All insurance has a cost, and achieving full protection is expensive, but there are other ways to use options.

Property

A-REITs offering much-needed income

Many listed property stocks were hard hit by COVID, especially in retail, but foot traffic outside Victoria has held up relatively well. Some sectors are now good value for the recovery and less working from home.

Sponsors

Alliances

© 2020 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.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. 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.