Monthly Wrap June 2020

Jessica Amir
June 26, 2020

As major developed countries see debt-to-GDP soar 24% in just two months, the true impact of COVID-19 it seems is finally becoming clear. It’s not all doom and gloom however, as opportunities are presenting themselves in the seemingly most unlikely of places – Tech.

In this month’s wrap, Jessica covers:

  • The economic snapshot reflects the grim reality of COVID-19 – (0:11)
  • Sectors: Tech uncharacteristically healthy during economic woes – (1:03)
  • Spotlight stock: Afterpay (ASX:APT) ^133%, claiming market leader – (2:07)
  • Key themes: Tax loss selling, record spike in debt vs. eco growth & confession season kicks off – (2:33)
  • Key analysts’ top picks for the new financial year – (5:49)
Read Transcript

I’m Jessica Amir, a market analyst with Bell Direct.

There’s no way to describe this financial year other than use an

F-word. F-loundering, F-altering and F-orgettable.

Australia recorded its first negative quarter of growth in nine years, down 0.3% from Jan to March.

The unemployment rate rose to its highest level in 19 years, 7.1% in May but the silver lining is that although the rate will peak in June, it’s likely to flatten out in July.

Wages grew at the slowest pace in two years up 2.1% year-on-year.

The public sector has already frozen wages and excess capacity is keeping wage growth flaky in the private sector.

The Aussie dollar fluctuated from $0.70 USD to a 17-year low of $0.55 USD in March and then somewhat recovered to its current level of $0.69 USD.

And we had a record fiscal support from the Morrison Government while the RBA did its bit cutting interest rates four times.

The Aussie share market had a forgettable year falling 12.5%.

Recessionary cycle shiners: Healthcare and Staples outperformed up 26% and 7%.

On the other side, Cyclicals like Energy, Financials and Real Estate dragged 34%, 26% and 23%.

The biggest anomaly when it comes to a recessionary cycle investing, was the Tech sector rising 13%.

Now looking to the future, we know the IMF tips the Aussie economy could fall 4.5% this year.

So what does that mean for investing, well as we are officially entering a recessionary cycle given the structural shifts and how sectors usually behave in contractionary phase, these sector trajectories are likely to continue.

We know Tech doesn’t usually flourish in periods of negative GDP but this time is different.

With record low interest rates, bond yields, coupled with societal shifts and online behaviour are all trumping up for Tech.

So far this has helped Afterpay (ASX:APT) find financial year first place up 133%.

On the flipside free-to-air regional TV and radio business Southern Cross Media (ASX:SXL) fell 80% copping a COVID-19 hit, with Unibail Rodamco Westfield (ASX:URW) seeing additional selling after being smacked out of the ASX100.

Now moving to strategy and ideas, firstly consider that tax loss selling comes to an end on Tuesday at 4pm.

Many investors take this time of year to review their portfolios to crystallize a tax loss to offset against any crystallized capital gains over the financial year.

It’s also time for rebalancing topping up those asset classes that have drifted from their long-term investment objectives and positioning portfolios for the turbulent times ahead.

So review your portfolio’s asset allocation, look for any tax offsetting opportunities and rebalance your portfolio back in line with your long-term goals.

Secondly, something else to consider is the multi-trillion dollar global government spending packages on infrastructure loans and loan guarantees.

The bars show stimulus announced in G20 countries as a percentage of GDP.

The major developed economies saw debt to GDP ratios surged 24% in two months.

Now if you compared that to the GFC, debt to GDP took two years to rise that much, so now the average debt level is at 152% of GDP, this is of concern so consider that.

Gold is seen as a store of wealth and Rises and demand and value in uncertain times, so if equities do head south, having gold in your portfolio could offset the blow.

And lastly consider company confession season kicks off in July, we’re really going to start to see how ASX listed companies have been impacted or not impacted by COVID-19.

Remember the first quarter results we’re not telling as we only had two weeks of lock downs.

Company results to watch included Ampol (ASX:ALD) (formally Caltex), South32 (ASX:S32), Woodside (ASX:WPL), Cimic (ASX:CIM).

The week after, Sydney Airports (ASX:SYD), BHP (ASX:BHP), Oil Search (ASX:OSH), Newcrest (ASX:NCM) and Santos (ASX:STO) report, followed by Credit Corp (ASX:CCP), Fortescue (ASX:FMG) and Origin Energy (ASX:ORG).

Now to trading ideas, well following the end of financial year selling, Mesoblast (ASX:MSB), one of the best financial year performers for example this week fell 22% to Thursday.

The company’s revenue has climbed 100% in nine months.

It’s working on trials in heart failure and back pain and Mesoblast is also working on a COVID-19 cure.

The company has staff on board who have commercialized drugs with Novartis which is one of the world’s biggest healthcare company.

Now Bell Potter backs Mesoblast as a key stock forecasting 60% share price growth.

Historically, some of the most heavily sold down stocks in the financial year see a sharp rally in the first three weeks of July, so consider that as well.

Morningstar tips Westfield (ASX:URW) as a fruitful recovery stock.

This week, UBS reiterated or rated Mervac (ASX:MGR), Freedom Foods (ASX:FNP) and Perenti (ASX:PRN) as buys.

UBS continues to see Telstra (ASX:TLS) and Woolies (ASX:WOW) as a buy.

Bell Potter’s new financial year pics were unveiled including Macquarie (ASX:MQG), CBA (ASX:CBA) and Mystate (ASX:MYS) in the financials.

In the Diversified financials and Fintechs Bell Potter pics AMP (ASX:AMP), Afterpay (ASX:APT) and Life360 (ASX:360).

In the Retail and Professional Services sector, Temple & Webster (ASX:TPW), City Chic Collective (ASX:CCX) and IPH Limited (ASX:IPH).

Lastly, if you’re looking more closely at gold then put your magnifying glass over gold companies like a Newcrest mining (ASX:NCM), which is backed by UBS and Citi, or Independence Group (ASX:IGO) and Saracen (ASX:SAR) are also backed by UBS.

Also look at (ASX:GDX), (ASX:MNRS), (ASX:PMGOLD)and (ASX:QAU) all of which have already grown 30% – 67% in the past 12 months.

On behalf of everyone here at Bell Direct, have a happy and safe weekend.

I’m Jessica Amir, see you next week.

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