MARKET VIEW
In the wake of the pandemic , technology stocks led by the FAANGs ( Facebook , Amazon , Apple , Netflix and Google ) + Microsoft , have sent global technology indices surging . Huge changes in social and business behaviour triggered a massive increase in demand from stay-at-home / remote working consumers to update home offices and home entertainment . Much of this pull-forward demand for office hardware and entertainment services appears unsustainable as restrictions are lifted and open air and space become accessible .
Domestically , Australia is seeking a return to normality . Being an island we have a much better chance of controlling coronavirus than both the US and Europe . But getting the economy back on a sustainable path to full recovery will be much more challenging . While the availability of a vaccine will assist the process and provide more certainty , the behaviour of the corporate sector in terms of job creation and investment will be critical . The RBA ’ s monetary policy is locked in on employment and inflation . The trend in both these sensitive economic benchmarks will determine the longevity of the historical low cash rate . Governor Philip Lowe says the board “ is not expecting to increase the cash rate for at least three years ” and “ is prepared to do more if necessary ” in terms of the size of the asset purchase program ( quantitative easing ). These are very definite statements , and it will be interesting to see what events trigger a blink of the eye .
The clear priority of fiscal policy has been to restore the jobs lost earlier in the year . The Seeker / Keeper support programs were very successful in stemming the losses and shoring up household income . In the June quarter the total number of jobs fell 7 % or by 1.03 million and hours worked fell 9.8 %. In the four months ended October , 375,000 jobs , or 36.5 % of those lost , were restored , still leaving a void of over 650,000 . The closing down of the Victorian economy will impact the November reading , its reopening supporting December . But the long haul is ahead with company management still proving cautious in adding to the workforce while others are still trimming . The RBA will be hoping employment growth and tax cuts will support household income and combined with elevated savings and a seven-year high in consumer sentiment , will underpin growth in household consumption . Offsetting this will be the withdrawal of Seeker / Keeper income support programs and below-trend wages growth as unemployment remains above 6 %.
The stronger than expected GDP growth of 3.3 % in 3Q20 was driven by household consumption , particularly of services . After a 12.5 % contraction in
2Q20 , household consumption rebounded in 3Q and with the reopening of the Victorian economy , further growth is expected in 4Q . Growth between 3 % and 3.5 % is expected in 2021 , suggesting Australia ’ s GDP will recover the lost ground in 2020 , perhaps by 2Q21 but certainly by 3Q . The onus will be on the household and therefore employment , which is still tenuous . Integral to Australia ’ s growth forecasts is China . Should the current spat escalate downward revisions may have to be addressed . Australia has an over reliance on China and this concentration risk should not be ignored by government or investors .
At current levels we view the market as moderately overvalued . The most undervalued sector is Energy with Retail and Metals & Mining seen as the most overvalued sectors .
Bruce McLeary
Associate Senior Analyst ( 07 ) 3006 7219 bmcleary @ burrell . com . au
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