Yep, that was a forecast everyone got right!

Recently we spent a very productive hour with the Portfolio Managers for Bennelong’s Australian Equity fund.

  • Bennelong Australian Equities, Separately Managed Account (SMA) is one of the options we use in the active equity space.
  • They had a very positive run over the three years to 31 August 2020 in Australian Equities, providing a compound return of 15.56% per year. In comparison, the ASX300 Accumulation index had a compound return of 6.24%. To put that in numbers, if you invested $100,000 with them on 1 September 2017, you would now have over $154,000. If you had just selected the index, you would have just under $120,000.
  • Even more impressively through this last twelve months to 31st August, with the ASX300 doing -4.82%, they had a return of 18.01%. On $100,000 invested, you would have been $22,830 better than the index. (Now just remember it is easy to pick last years’ winner so we are not about to go all-in, but we do like this manager and they have an impressive track record – we added them to our portfolios in November 2017).

I mention their track record, as when we get a chance to talk to both the senior managers in the portfolio, one on one – or zoom to zoom as the world works today – we pay a lot of attention.

Bennelong’s success over this very recent difficult period has been based on the firm belief that the pandemic would see an initial economic retraction and then a V-shaped recovery and they were saying this in March, while the media was releasing the lifeboats.

Interestingly enough, this has been born out in most westernised countries, and to some extent in Australia, but we are rapidly becoming the worst performer. A major reason, according to Neil Goldston-Morris from Bennelong, that Australia has not recovered as well, is internal border closures.

  • The EU for example closed to non-EU countries, and is steadily reopening now, but did not close internally. Euronews on borders.
  • The US is almost back to pre-covid consumer patterns and unemployment numbers continue to drop – The US added 1.4million jobs in August and employment has dropped to 8.4%. US unemployment numbers below.

Obviously a few other issues going on in the US that we don’t want replicated here but they are getting back to business.

  • In the UK, Scotland, Republic of Ireland, the Channel Islands and Isle of Man are all inside the ‘common travel area’ with no border restrictions. UK unemployment is only 4.1% at 31 July 2020.
  • Canada has some differing rules in some provinces but travel between them is not restricted. Unemployment is currently 12.3%.

Reading some of the rules in other countries is interesting but there is a common theme. 10 days (not 14 days quarantine) if moving countries or Zones, but a big difference is no quarantine if you have tested negative within 72 or 48 hours of crossing. Wouldn’t that make life simpler?

Neil would argue, that in Australia this has now simply become a political tool and any argument against that disappeared when the ‘National Cabinet’ refused to define a ‘hot spot’. A definition would make them accountable and they would then have to accept expert opinion as produced by Australia’s medical experts not State appointed bureaucrats – we have a federal panel chaired by Dr Brendan Murphy. Australia’s expert panel. These are actual experts and their recommendations are not political.

Enough about borders – let’s look at impacts and numbers.

-7 GDP growth for the June quarter.

Neil pointed out that buried in the release of the June GDP figures, were some interesting numbers and when I then followed it up, I thought I was misreading them.

  • Weirdly household income is up? The extra funding by the federal government is adding to households (on average). This could be one of the reasons so many are happy to be locked down?
  • The other surprising number is that household saving has gone through the roof. For the 2018_19 financial year, the ratio was 3% – the lowest it had been for eleven years. In 2017_18 it was 3.5%. The ratio represents the rate of household income saved from household net disposable income. Arguably when consumers are confident, they spend money but when concerned, they hold on to it.

For the June 2020 quarter the savings ratio has gone to 19.80%.

This does provide a very big light at the end of the tunnel as it would indicate that when confidence returns, households have money to spend.

There is however a lot of bad news.

While households are being supported by the federal government, businesses do not have similar safety nets and many businesses have simply been devastated.

The graph below gives a good representation of how dramatically sectors of the community have been hit.

  • Transport services have dropped by 88.2%, this includes air, trains, buses, taxi’s and Uber and all the associated businesses that support them.
  • Accommodation services have dropped by 77.5% – our north Queensland families (who rely heavily on Victorian Tourism during winter) and apartment and hotel accommodation in all the city centres as well as the GC would be hardest hit by this.
  • Catering Services dropped by 55.7% in the quarter and that was even with some reopening in most states by June.
  • Recreation and culture are also down by almost 55%.

So what is doing well?

As suggested by our analysts back in March, businesses like James Hardie (all things building), Wesfarmers (Bunnings and Officeworks), Harvey Norman (Boom times for Harvey Norman) and JB HiFi (All things electronic) have had a very good financial year. I include the article above from Gerry Harvey saying he has never seen a year like it.

The index is down because big stocks like the big four banks and Telstra have had a very torrid time.

Share Prices16th Sep 201916th Sep 2020% Down

Client reviews at the moment are quite surprising as many come in expecting bad news and find things are well and truly up.

Bennelong are not overly worried about valuations and continue to be positive on markets generally. Active managers are definitely paying their way at the moment.

Quick Covid19 update

As at 15 September 2020

  • Queensland has 27 active cases, no community transmission and the only case in the last four days was someone in hotel quarantine. Queensland has eight Covid19 infected people in hospital and no-one in ICU or on ventilator (and our hospitals are for all Australians and our visitors – couldn’t help myself).
  • NSW has eleven people in hospital of which 5 are in ICU and three of those five are on ventilators – per capita, NSW should be closing their borders to us.
  • Even Victoria only has 107 people in hospital and of those, eleven are in ICU and six of the eleven are on ventilators.
  • Across the whole of Australia, we have 126 Covid19 infected patients in hospital.

Yes, we should all be careful and accountable and maybe it is time to take responsibility back for our decisions and consider both lives and livelihoods.