We agree we’re on the rebound but torn on where to next.
The week that was: We agree we’re on the rebound but torn on where to next
The virus’ latest
Containment measures continue to dampen virus cases and Australia’s success has rightly been lauded by many. As we continue on the road back, the thoughts of government and business turn to what’s next?
There has been some divergence in states already with some looking at easing restrictions, while Victoria is looking to maintain a tighter hold on movement until the state of emergency is reviewed on 11 May. Schools also became a hot button topic with Victoria resisting calls from the Federal government to loosen restrictions and get students back into the classroom.
In New Zealand, their PM has declared the virus effectively eliminated for now, and have stepped back to stage 2 restrictions. What lessons does this provide for Australia? There are two schools of thought emerging for Australia’s COVID-19 recovery plans;
1: the elimination approach. Maintain a strict lockdown for longer with hopes of eradicating the virus, and; 2: controlled adaptation. Ease restrictions sooner with acceptance of higher risk of further outbreaks.
Modelling appears to support the elimination approach as delivering a better chance of economic recovery due to the greater sense of safety and confidence it would bring – an approach New Zealand took which is now amid their bounce back.
The release of the COVIDSafe app saw strong uptake, overcoming raised security and privacy concerns. While concerns are warranted, the ethical imperative for downloading the app is strong, particularly as we look to loosen restrictions. The app aspires to reduce harm, risk and infections.
This week the US virus count hit the unenviable milestone of 1,000,000 – and fragments in their government are beginning to show. It’s still going to be a long road back, but there’s hope the cases have peaked.
What to make of the latest from the market?
Last week Westpac flagged potential large bank loan losses while NAB cut their interim dividend by 60% with ANZ delaying their dividend entirely. Multinational finance group HSBC’s profit halved as it boosted provisions against bad loans.
There is a growing trend of capital raising that is expected to continue over the coming months, depending on COVID-19 outcomes. $15bn of capital raisings were announced or completed over the last six weeks and FY20 is shaping up for the highest levels since the GFC.¹ This has been across a broad range of sectors including financials, property, healthcare and consumer discretionary. Compared to the GFC, Australian corporates generally have stronger balance sheets, although uncertainty over the duration of COVID-19 remains.
Off-the-back of this increasing trend, we have been selectively participating in the recent capital raisings across our portfolio including in stocks such as Webjet, Ramsay Healthcare, QBE Insurance Group, National Australia Bank and Lendlease.
Jon Fernie, Head of Equities at U Ethical explains that the reasons for the capital raising vary depending on the company.
“Broadly speaking capital raises provide strengthened balance sheets, additional liquidity and more flexibility moving forward.
“The downside of the capital raising is the dilution to earnings for existing shareholders.
“However, for companies that we believe the medium-term outlooks remains solid and/or the pricing attractive, we will look to participate in,” Fernie said.
We found the following two podcasts we believe may be of interest to our investors:²
1, The Harvard Business Review ‘After Hours’ podcast, a series of episodes exploring the COVID-19 crisis. Notably, episodes: ‘27, Predictions for the New Normal’ and ‘29, Companies and Consumers Show their True Colours During the Crisis.’ The episodes can be accessed here.
2, Bloomberg’s ‘Balance of Power’ podcast which looks at the global impact of COVID-19 as well as the politics and policies being shaped by the agenda of President Trump’s administration. Click here to listen.
We will continue to share real time updates on our LinkedIn page located here.
For now and as always, please stay safe, happy and well.
² Any information, opinions, estimates and forecasts in the podcasts reflect the author’s judgment and U Ethical makes no representation and gives no warranty or consideration as to the accuracy, timelessness or completeness of any information contained in the podcasts. Nothing in the podcasts constitutes a U Ethical representation in respect of any investment information, strategy or recommendation.
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 (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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