Market Review July 2020

Australian equities:

The recovery in Australian shares was cut short in July amid reports of growing Covid-19 cases and anticipation of harsher restrictions in Victoria. Early in August, the Victorian government announced a state of disaster and moved to stage four lockdown, which will see an estimated 1 million people restricted from going to and from their workplace for at least six weeks, while only essential businesses including supermarkets and pharmacies may remain open. The S&P/ASX 200 Index gained 0.5% over the month, dragged down by the energy and health care sectors. Materials performed well over the month, with strong returns from Fortescue Metals Group (+25.7%) and Oz Minerals (+24.4%). In early earnings reporting, Rio Tinto (+4.2%) announced that 1H 2020 EBIDTA fell 6% on the prior corresponding period due to lower commodity prices during the half but reconfirmed its 2020 production guidance across all commodities. Wesfarmers (+3.8%) gave a Covid-19 update following Victoria’s lockdown announcement: all of the group’s retail businesses will continue online operations through home delivery and contactless click and collect, while Bunnings will remain open for trade customers only. In FY20, Wesfarmers derived approximately 17% of retail sales from stores within metro Melbourne

Global equities:

Global shares continued their march higher in July, rising 0.6% in Australian dollar terms and 3.5% in local currency terms. With around half of S&P 500 companies having reported at the time of writing, it is clear earnings have been severely affected by the pandemic, although not as badly as anticipated. The US share market has been supported by the ‘big four’ tech giants (Amazon, Apple, Facebook, and Google), all of which beat estimates. Amazon (+14.7%) was arguably the biggest winner, reporting the largest quarterly net profit in its history, nearly double that of the corresponding quarter in 2019. Apple (+16.5%) reported revenue of US$59.7 billion, above estimates of US$52.2 billion, while every major product line saw year-on-year growth and beat analyst expectations. Microsoft shares (+0.7%) posted modest gains as the company tried to salvage a deal to buy TikTok’s US operations. Across the Atlantic, EU leaders have been relatively successful in containing the Covid19 virus and providing much-needed fiscal support. In July the European Council approved a €750 billion package to fund fiscal transfers between member states. Since March, the euro has been on the rise against the US dollar as investors see European assets as increasingly attractive.

Property:

Australian REITs were mixed over July as the economic pain from the pandemic rolled on. Shopping centres, which play a prominent role in the A-REIT index, remain affected by reduced foot traffic and struggling tenants. Scentre Group (-6.0%) gave an update on its half year results, noting that the carrying value of its property portfolio as at 30 June 2020 will be down approximately 10% from the end of 2019, with Covid-19 impacts the overriding reason. Meanwhile, some diversified and industrial funds have held up reasonably well during the crisis. Charter Hall's Long WALE REIT (+8.2%) has been spared the worst despite one of its tenants, Virgin Australia, vacating its Brisbane headquarters. Centuria Industrial REIT (+3.8%) has similarly weathered the storm, reporting funds from operations per unit of 18.9 cents in FY20, in line with its revised guidance. Centuria will launch a $341 million rights issue to fund the purchase of the Telstra Data centre in Clayton, Melbourne. In the US, REITs returned 3.6% in US dollar terms, boosted by warehouse and industrial REITs (+12.5%) and dragged down by shopping centres (-10.2%) and hotels (-7.8%). Globally, developed market REITs returned 1.4% in Australian dollar hedged terms.

Fixed income:

July saw further compression in yields and a tightening in spreads as central bank liquidity continued to flood the market. In the US, the Fed intends to hold the funds rate near zero until the economy has weathered the pandemic. Broad support from the Fed and its presence in the ETF market have helped to tighten spreads across both investment grade and high yield segments. The Fed also includes ‘fallen angels’ in its corporate bond purchases, while the European Central Bank has been more targeted in its approach, resulting in euro high yield being more exposed to volatility. A hunt for yield in the US market has also seen investors shift up the credit curve. The return on US high yield corporate bonds was 4.7% in July in US dollar terms, the highest monthly return since October 2011. According to the RBA, Australian government bond markets are functioning normally and have seen a solid increase in issuance. The yield on 3-year government bonds has been mostly in line with the RBA’s 0.25% target, although it has been slightly higher in recent weeks, prompting the Bank to resume purchases in the secondary market. The yield target will remain in place until the RBA is satisfied it has brought the inflation and unemployment rates in line with its objectives.