Australian investors are waiting for firm signs that the COVID-19 recovery trade is taking hold and that it’s safer to move into stocks leveraged to the economy, such as the banks, culminating in a sluggish third quarter.
The ASX struggled from July to September, trading sideways for the best part of three months before ending the quarter with a 1.4 per cent loss.
Large cap banks weighed the market down, with Commonwealth Bank down 8.4 per cent at $63.61 and Westpac down 6.2 per cent to $16.84 over the three months, as fears about the potential for higher levels of bad debts continued to depress sentiment.
“People aren’t willing to believe the bad debt numbers until we get past the payment holidays that finish in March 2021,” said William Curtayne, portfolio manager at Milford Asset Management.
“The market is saying we will believe it when we see evidence. That has weighed on their share prices a bit. At the same time, margins continue to compress.”
The banks are a big swing factor for the market, said Romano Sala Tenna, portfolio manager at Katana Asset Management.
The signs may be looking more positive, however, with Federal Treasurer Josh Frydenberg’s announcement that responsible lending requirements will be rolled back.
“Generally, responsible lending [rollback] effectively allows the banks to roll over non-performing loans in a way that is compliant,” said Mr Sala Tenna. “We avoid the bad debt cliff in a way, and push it into a slope.”
There is no doubt “that banks are cheap” on any measure, he said. “With the exception of Commonwealth Bank they are trading below book value.”
The federal budget, to be revealed next Tuesday, may see more economic support via tax cuts and higher levels of infrastructure spending from the government.
Mr Sala Tenna is starting to see signs that the COVID recovery trade is inviting a bit of momentum. “I’m surprised it hasn’t been more widespread to some of the cyclical laggards – some of the REITs, some of the industrials, travel, retail,” he said.
Still, “we are going to see some of these laggards recover. Barring a third wave, that’s probably the big trade for next quarter: the recovery trade.”
For now, “I think that people are fluctuating between preparing for the recovery trade and then flicking back into tech when things get a bit wobbly.”
Companies with offshore growth and relatively low cyclicality have been the structural winners of the quarter, such as buy now pay later star Afterpay, Mr Curtayne said. Afterpay jumped 31.2 per cent to $79.99.
Looking ahead, “if the economic growth outlook gets worse over the next three months then we are likely to see some of these bond proxies or structural growth companies do quite well and outperform again”.
“But if we get some positives and the market is more optimistic about growth in 2021, then we could see some of those underperforming sectors do better in the fourth quarter and that would include the banks and other cyclicals.”
There are risks ahead, such as whether the US can pass a fiscal stimulus package this week. “A good package will give confidence in that growth can do well,” Mr Curtayne said. But it’s not a certainty.
The upcoming presidential election in November is another risk. A decisive victory and quick change of power are key to a market-friendly result, said Mr Curtayne. “The worst thing would be uncertainty.”
“Then we have vaccine news,” he said, specifically whether there is one or not and the timing of any vaccine.
The fund manager is positioned with a foot in both the recovery and the defensive camps. “We would rather react when we see the outcomes.”
“Volumes have been very low over the last month and I think that people are siting on their hands and waiting for direction from these key catalysts.”