CHRIS BURRELL ’ S BLOG
The pivot to defensives as a result of COVID has assisted the recovery of portfolios since March 23 , subject to earnings effects on announcement .
Cyclicals including banks , insurance , oils and telcos such as Telstra are trading materially below FVE ( Fair Value Estimate ) as these sectors recover in calendar 2021 . This should assist portfolio returns . Growth at reasonable price ( GARP ) stocks continue to be favored i . e . where the growth is being reflected in a higher valuation multiple .
Growth stocks where valuation multiples are extreme should be differentiated from GARP stocks as there appears to be a technology and valuation bubble particularly in some stocks in the USA . Themes are useful , including the switch in the Burrell Focus List in March and ongoing to selected stocks with defensive earnings during the current period .
The breaking of the drought is another theme which has been useful in 2020 . Eating at home is an interesting theme as it may prove to be transitory to an extent as restaurants and hotels return to normal .
The reopening theme can be separated into two time periods . Of more interest presently is the reopening of Australia and New Zealand such that stocks associated with domestic travel e . g . petrol retailers may be seen to benefit . Your diarist cautions against moving too early with respect to stocks concerned with international travel , as the international borders may not open until late 2021 . Indices such as the ASX S & P 200 Index have performed well off the March 23 COVID low . While the TINA effect and vaccine progress may continue to support the indices , it is possible they may underperform if there is some correction in growth stocks over the next 12 months . Hold for now , but watch list to switch to individual stocks .
International A Biden relief market surge and vaccine progress are positive for the international markets . The geopolitical issues associated with the US election may involve some reaction to the uncertain Senate outcome and any antics during the handover process . There is also a likelihood that a science based approach to the COVID emergency in the USA will lead to shutdowns and some negative reaction as the market takes a reality check . The TINA effect is also important in the US . The conclusion is that there may be a ying and yang in the US , such that some further buying opportunities arise in selected stocks .
Economic Affects in 2021 The major uncertainty for calendar 2021 is how the Australian and international economies respond to stimulus measures and the removal thereof . It is likely Australia will see earlier removal than the US , which will require further stimulus to deal with the potential shutdown of the traumatic increase in COVID daily cases . Australia / China trade issues require a more positive approach by Australia .
Portfolio Returns The majority of equity portfolios fell 25-30 % to the COVID low on March 23 . Today , many are off in the range of 5- 10 % with some in positive territory . This is indeed a pleasing recovery when we are partway through a pandemic , a black swan event . The S & P / ASX 200 accumulation index is down 2.2 % for the period from 1 / 07 / 2019 to 6 / 11 / 2020 . The same index is plus 5.1 % from 1 / 07 / 2020 to 6 / 11 / 2020 i . e . the current financial year to date . The Australian market is up a further 3.5 % in the relief rally .
Given cyclicals are lagging , it ’ s probable that for the June 2021 year returns will further increase from current levels , all other things being equal . This will depend in large part as to the progress in calendar 2021 with economic recovery by country and globally .
Australian managed funds have generally performed not as well as direct portfolios , although given there are some 660 managed funds in Australia , there will always be those that outperform and those that underperform . However , the direct portfolios have performed well in the recovery phase to date from the March COVID lows .
Benchmarks are difficult at any time , but particularly so in Australia as balanced and moderate growth benchmarks vary widely depending on the assumed allocations to domestic Australian v international equities . Example one of the major benchmarks used in the Burrell Premium Portfolio Service is from a US provider that assumes an allocation to international stocks about equal to that of domestic Australian stocks . Given the benefits of franking and the volatility of international stocks in Australia caused by exchange rates , Burrell clients usually have a higher allocation to domestic Australian stocks than to overseas stocks . The US market has had a strong run up prior to COVID and is trading at generally higher valuation multiples .
In considering portfolio returns , one must consider risk . There are few measures of risk easily available to investors . It is complex to calculate correct portfolio returns which the Burrell Premium Portfolio Service excels at . But there is
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