A VIEW FROM THE TOP END

Markets:

We hope that everyone enjoyed the holiday period. Markets typically trade lightly over the holidays, and this year is no exception. For the last two weeks the ASX200 returned 0.35%, with both American indices falling approximately 1%. The Australian Dollar continued to appreciate, and is now above 77cents per USD, its highest mark since Mar 2018. Markets were impacted by Georgia election expectations, expected stimulus in the US, the delisting, then relisting of Chinese companies on the New York Stock Exchange and of course vaccine news.

Vaccine Tracker

We at TFM are closely watching the roll out of the various COVID-19 vaccines both at home and abroad. It must be remembered that Australia and our friends over the ditch have fared very well through this pandemic relative to the rest of the world. This has put us in a very lucky position wherein the vaccine is not the only solution to the current outbreaks that we are having within our borders. This story is very different across the world, where the rush to obtain and vaccinate each country’s population as quickly as possible is on.

To return to normalcy with international travel and without QR-codes, Australia and international destinations need to reach a level of vaccination that allows herd immunity. Herd Immunity is the level of vaccination a group of people need to reach that reduces transmission and prevents outbreaks from occurring. The level of the population that would be required to be vaccinated to achieve herd immunity varies depending on contagiousness and vaccine effectiveness, but for COVID the magic number is speculated to be 70-80%.

All COVID vaccines contracted for Australia require two shots to inoculate a single person, meaning that a total of 36-42million vaccines will need to be administered to reach herd immunity. The Australian Department of Health currently has contracts for more than enough vaccine doses, the main challenge is administering the vaccine to the population.

The Department of Health will begin roll out of the vaccine in early March 2021, with an aimed completion date of the end of the year. This implies for herd immunity (70%-80%) 40m vaccines will be administered at a rate of 148k per day. To compare Australia’s vaccination rate with other countries, we have normalised the figure for population (~25m) revealing that we will need to distribute daily 5,700 vaccines per million people.

We invite you to track the administration of the vaccine with our compiled live data per country (https://www.territoryfundsmanagement.com.au/vaccine-tracker). Each figure is normalised for population and we also track the total % of the population of each country that has been vaccinated to date.

In the above graph you can see there are some definite outliers, most notably Israel and Bahrain, which are very quickly and successfully rolling out their vaccines. Most countries are sitting below the required Australian mark of 5,700, with the majority sitting below 3,000 per million.

We will be watching any developments closely and will be regularly updating our tracker with any further research and findings.

Updating our checklist:

• Valuation: ASX & S&P500 levels: If you have been following the valuation section diligently for the last few months, you will have seen a common sight of the S&P fwd P/E at 26x+. Well analysts have dramatically raised their estimates for earnings next quarter, and what has happened is the valuations for the S&P and ASX have both dropped on the revision. This is one of the dangers of using this metric as your only “sell” signal or worrying that the market is too expensive to invest. The data must be analysed in context of the business cycle, and with us beginning a new cycle with Covid it was likely this revision was coming (and more will come) instead of prices falling to bring ratios back to historic averages. The S&P fwd P/E ratio is now at 23.2x and the ASX200 fwd P/E is sitting at 21.4x. The market looks “cheaper” than a month ago despite the rise in share prices.




• Global PMIs: PMIs continue to show expansion in the OECD countries. Consumer confidence in the US came in lower than expected prior to the holidays. The recovery is still taking place, but it is slowing as Covid cases rise during the traditional flu season in the Northern Hemisphere. Vaccine distribution cannot come quick enough for these regions. Despite some choppy data, we do not expect a fall in equities over the next 12months.


• Downgrades on guidance: Confession season continues in Australia. We have not seen any downgrades over the holidays of note. With a vaccine out and the government’s plan circulated companies will be able to provision outcomes. It will be an interesting next 3months, but we should see more confidence emerge.


• Infection rates to slow globally: This week we were locked down in Brisbane (our home office location). It was a single confirmed case of the fast-spreading UK strain of Covid that caused the lockdown. We see cases of this style of lockdown continuing globally until we reach herd immunity unfortunately. Mobile data shows that the hits from these lockdowns are not as severe as when we first locked down, but they still hurt recoveries in traditional businesses.


• Monetary and Fiscal stimulus announcements globally: With the makeup of the American government settled and waiting to be sworn in Jan 20th, 2021 we have the Democrats in full control. It was a bit of a surprise that they broke a 30yr losing streak in the Georgia run offs to take both senate seats in the state, but at the end of the day that was the result. With full control of the government the market expects President Biden to have more leeway in enacting his agenda. More stimulus is expected as well as re-entry into the Paris Climate accord. Stimulus will continue to drive markets.

The New Year has started off with a bang from a geopolitical standpoint. Markets have largely ignored the commotion in the US capital and continue to steam ahead. The year has just started, but we will continue to sound like a broken record when we say that it is important to stay invested, despite the headlines you may read. The economic cycle is positioned well for equities now and we have lofty expectations for the coming year in the market. If you do find yourself with extra capital after the holiday season, please contact one of our advisors. They are trained to implement our portfolios in a way that will help you reach your financial goals. We remain optimistic for 2021, take care and we will speak again in two weeks’ time.

Regards,