Value Investment Partners Market Report

September 2020

The third quarter of 2020 saw a regression in the Australian equities’ momentum from last quarter, as the ASX 200 index closed at -0.42%. Unprecedently in a time of economic struggle, the market reacted well to typically classified growth stocks, whereas defensive companies battled for a large part. Consumer staples exemplifies this, as it traded at a loss of 3.91% on the quarter. Information technology had arguably the best sector performance on the quarter, with digitalization and working from home becoming normalized amid and post-pandemic. Our asset allocation was heavily defensive being overweight staples, utilities, and healthcare, but our stake in consumer discretionary prevailed as the leading contributor again, realizing a gain of 6.30% on the quarter.

Following its resurgence last quarter, the broadly listed property market has remained remarkably resilient at a return of 6.96%, fueled by lagging return to work and the re-opening of additional businesses. Our portfolio was overweight in defensive industrial exposure, being largely responsible for outperforming the index at 9.60% on the quarter. The consensus among the banks is relatively optimistic, illustrating a growing belief that real estate is weathering the COVID-19 storm. However, the Melbourne market still appears to be anchoring down the results, with respective dwellings dropping by 0.9% in August (CommBank 2020). This underperformance is intrinsically linked with the extent of social distancing policies and border closures which also has a direct effect on labour market conditions and sentiment. Outside of Melbourne, most of the capital cities returned positive growth and reflecting more consumer activity. Looking forward, we expect an increase in property activity due to the easing of tighter restrictions and positive revised projections from the banks.

The international market has been largely bullish, fueled by the rise of the technology sector with the S&P 500 showing a significant return of 8.33%. This can be explained as the continuation of the tech sector’s dominance as the shift towards remote working is now being normalized and regarded as less of a temporary fix. Growth for the tech sector is encouraging and becoming a staple holding for most investors as the prospect of low interest rates for an extended period becomes more of a reality. VIP was optimally positioned to absorb an appreciation in the technology sector, however our defensive allocation resulted in underperforming the comparative index. Consistent with Australian markets, consumer discretionary experienced a solid quarter of growth, adding to the bullish sentiment towards growth sectors.

As the market yields have plummeted, the threat of capital losses prevails as an unlikely outcome. More simply, the flat yield curves minimize the compensation from taking longer-term risk. These conditions have led us to the school of thought of being largely bullish on credit, given that the spreads have provided more than enough compensation for the added credit and liquidity risks. The portfolio over this period has been repositioned to have a higher exposure to the credit market and as well targeting Australian government bonds within our bond allocation through both ETF’s and the JCB Active bond fund to benefit from projected returns in Australian government bonds.

Sources Referred and Data Collected From: Bloomberg, Commbank, & NAB.