Investor update: 18 June 2020

Stimulus reflates the market balloon but will it burst?

Looking back over the week that was, volatility has persisted across global markets with large moves across bonds and equities. Noting Wall Street as the global risk barometer we observed some staggering shifts across investor sentiment to note:

The Dow Jones Industrial Average Index rallied to an all-time high of 29,551 on 13 Feb 20. Fears of the economic impact from the COVID-19 pandemic, the market retreated to 18,591 on 24 March 20, a significant fall of 37%. As the world went into lockdown and the global economy entered a semi-comatose state, efforts from Central Banks to support an ailing economy and to thwart the risk of the first global economic depression in 90 years, spurred an unprecedented recovery. By 8 June, the index had recovered 35% despite the gloomy economic prognosis.

Last week saw a big jump in volatility as surprisingly strong US nonfarm payroll figures boosted sentiment to see the market reach a near term peak of 27,572. However, the optimism quickly evaporated with a fall of 9% on 11 June as fears of a second wave of COVID-19 infections spooked investors. Investor sentiment continues to oscillate wildly as fears of a second wave of COVID-19 infections contrast to the absolute levels of monetary and fiscal stimulus poured into the global economy.

Chief Investment Officer James Cook explored the impetus behind the spike in volatility:

The actual economic figures don’t really matter as they are still deeply negative after the previous months’ figures had also been revised downwards. It is the fact that they were not as bad as the market was expecting that is important. In such times, sentiment rules.

The big conundrum at present is the trade-off between the problematic longer term economic outlook in a post COVID-19 world vs the weight of money argument. At present the weight of money argument is winning.

Attractiveness of equities yet to diminish

Bouts of fiscal and monetary stimulus in the US and around the world have increased global money supply dramatically. In the absence of inflation the real yield is constructively negative making the choice for equities, even on a subdued outlook, still relatively attractive to most other plays, especially debt related ones.

This explosive growth in money supply has created a powerful surge in liquidity. And in absence of any real demand for funds or capital from the real economy and the dismally low return from fixed income/cash investments, money has flowed into financial assets, boosting the stock markets’ recovery. This is seemingly in contrast of any real earnings growth or prospects for across the medium term. The rally has subsequently raised equity valuations to very high levels raising the risk for many investors who have recently scrambled into the markets. This has intensified our levels of cautions surrounding holdings across our portfolios, well aware of investment guru Warren Buffet’s oft cited quip suggests, “Only when the tide goes out do you discover who has been swimming naked”.

Most major economies are now experiencing significant monetary and fiscal stimulus which will continue to fuel the liquidity base and no doubt further stock market gains… for the time being.

However, at some stage the party will be over and the hangovers will start. The printing of money at the rate we are currently experiencing will ultimately debase the issuing economies posing challenges way beyond the current vision.

Once the relief packages such as Australia’s Jobkeeper program end, the underlying economies will need stimulatory measures which carry a multiplier effect – not just support packages as current. With households generally indebted with low levels of savings, a structural shift in the unemployment rate would prove telling.

With all of this in mind, our portfolios remain defensive via a small cash overweight in the Growth Portfolio as we have elected to ride the equity rally to reduce our underweight position. Equity portfolios remain defensive with cash holdings >5%*.

Health and tech help champion recovery hopes

IT and healthcare continue to be the best performing sectors on the ASX so far in 2020.

Head of Equities Jon Fernie notes, ‘contributing to this is that many stocks in these sectors (although not all) have been less impacted by COVID-19 restrictions and are also well positioned to benefit from structural growth even in a softer economic environment.’

James Dunn from Nabtrade commented that while it’s great for the sector – this could also shoot a warning signal.¹

“Healthcare stocks are being seen as a relatively safe haven. That could be a worry in terms of valuation – but quite a few of the healthcare stocks have very sound long-term growth prospects in a post-COVID-19 world,” he said.

Dunn went on to mention that CSL and Ramsay Healthcare are two stocks that fit this bill.

As of recently, it appears that U Ethical stock CSL continued to undertake some heavy lifting in the ASX 200².

¹NabTrade website, published 08 April 2020, ‘Four healthy stocks in a post COVID-19 world,’ accessible via:, accessed on 12 June 2020.

²Sydney Morning Herald, ‘CSL, Wesfarmers keeping ASX in the black’ published 10 June 2020 1.58pm, accessible at:, accessed on 10 June 2020.

Important Information:

The market commentary reflects U Ethical’s position at the time of publication and is subject to change. U Ethical reserves the right to make any adjustments to the investment strategy or outlook for all products at any time to reflect major disruptions or changes in the financial markets, as allowed by the relevant governing documents, Product Disclosure Statement, Information Memorandum, or Offer Documents. Past performance is not indicative of future performance. All investments carry risks. There can be no assurance that any U Ethical product will achieve its targeted objectives or rate of return and no guarantee against loss resulting from an investment in any U Ethical product.

U Ethical is a registered business name of Uniting Ethical Investors Limited ABN 46 102 469 821 AFSL 294147. This material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. Before making any investment decision, you should therefore assess whether the material is appropriate for you and obtain financial advice tailored to you having regard to your individual objectives, financial situation, needs and circumstances. This document may include general commentary on investment methods, market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused.

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