Darren Letts
Equity Dealer
Equities
9 Dec, 2021

The Australian equity market has enjoyed above-average returns this year despite the extensive lockdowns we all endured and kept working within. Currently, the ASX200 has posted a solid 17 percent total return (inclusive of dividends) against the average 9.4 percent of the last ten years.

All sectors show positive returns and not surprisingly the strongest has been the Communications sector. Our reliance on internet connections and mobiles was heavily tested in the work from home environment and that has been reflected through share price returns.  

Source: Bloomberg

Looking through sector performance and at the list of companies that have outperformed – Pilbara Minerals (PLS) tops as the demand for Spodumene surged in 2021. PLS was selling its concentrate on the Battery Material Exchange (BMX) and the pricing achieved on this platform this year reflected a Chinese converter market caught short of feedstock after the more than 200% jump in electric vehicle sales this year in China. As more supply comes into the market next year these price surges will subside but PLS has capitalized and will continue to supply short term contracts at premium prices in the near term.   

As highlighted above the Telco sector outperformance was driven by Telstra and Uniti Group Limited. UWL’s revenue tripled this year as demand for their extensive open-access broadband network surged. It also allowed them to maintain a healthy 78% gross margin.

Chalice Mining’s amazing run has continued culminating in admission to the ASX200. Their Gonneville deposit contains platinum, palladium, nickel and cobalt as well as copper and gold. The combination of the largest platinum group (PGM) discovery in Australian history and largest nickel sulphide discovery since 2000 at shallow depths while the world is going through an energy transition has driven Chalice to $3.79 bln AUD market cap despite scoping studies remaining ongoing well into next year.

Source: Bloomberg

Contrasting styles in funds management business are noticeable above as well. Pinnacle Investment Management (ticker PNI) has a diversified structure growing investment management firms (Affiliates). They provide seed funding, distribution and infrastructure services while retaining some ownership. This has resulted in a ten-year CAGR to 30 June 2021 of 24.1% per annum. In contrast, Magellan’s high-profile fund managers have endured a period of underperformance. Unfortunately, large portfolio pivots following the significant market movements around the initial Covid outbreak and a heavy exposure to US-listed Chinese companies have been detrimental to results. Recent news of the departure of their CEO Brett Cairns has weighed on the share price in recent days.  

Looking Ahead……

Prediction is the folly of fortune-tellers and this forum is to discuss issues impacting markets relevant to current market positioning. The market will remain focused on these topics in no particular order of importance – despite a highly vaccinated population we are still living in a Covid environment and the associated government policy uncertainty that entails; there will be an increasing focus on climate change as its political importance escalates into federal elections in May; the extent of inflationary impacts on the economy and finally the impact of a China slowdown on the Australian economy. Looking at themes for the major sectors:

Financials

The ASX200 has a 29.37% weighting to Financials so the first place to start is the banks. Currently, forecasts are that long-term bond yields will continue to rise across most major economies with short-term inflationary pressures remaining strong. In this environment, the major banks with the strength of their balance sheets and healthy dividend yields will continue to attract interest. If the RBA commences raising rates later next year the net interest margin should improve with marginal asset quality deterioration. Currently, only CBA remains over-priced by analyst expectations with Westpac offering the most upside with a $25.61 blended forward price target and an 8% indicative gross dividend yield on current prices.

Further afield, the current global M&A boom is expected to continue and will support the likes of Macquarie and Computershare. A rising rates environment should support sector earnings for insurers and health insurers, who are benefitting from the Covid environment. Covid concerns have suppressed elective surgery demands while the health and wellbeing focus has maintained the demand for coverage.

Materials

The slowdown in China’s property sector has already shown up in the collapse of the iron ore price over the second half of this year. Australia’s iron ore miners while seeing a decline in company profits are still well-positioned on the production cost curve and most investment banks are now pricing in a normalisation of activity into price forecasts next year.

In their recent commodities outlook Citibank stated after five solid quarters in which commodities outperformed equities, rates and credit, the asset class wobbled in 4Q’21, setting up what looks to be a significantly more diversified sector in 2022 and 2023. All commodities save gold, silver and PGMs performed well with the recovery from the pandemic. Going forward, expect energy and bulks to underperform, with base metals (especially aluminium and copper)r to outperform. The diversified mining heavyweights of BHP Group Ltd (ticker BHP) and Rio Tinto Ltd (ticker RIO) remain well supported by analyst modelling and offer double-digit gross dividend yields at current prices.

An investment in gold stocks this year has been disappointing as the cryptocurrency phenomena has suppressed investor appetite for gold stocks, but as a rule gold exposure is a hedge against inflation and upticks in volatility. Both Newcrest and Northern Star have the highest weighting in the popular Van Eck Gold Miners ETF so will reach the broadest audience of investors.

Healthcare

Healthcare names outperformed over the second half of the year and given the severity of this year’s northern hemisphere winter, the defensive nature of the sector should see a continuation of the trend. Currently, while some have hold ratings, no analyst has a sell rating on CSL, the largest stock in the sector. Despite the issues CSL Ltd (ticker CSL) has experienced with plasma collections in the USA the most recent initiation by Barrenjoey is an Overweight with a $330 price target. Resmed (ticker RMD) and Sonic Healthcare (ticker SHL) similarly remain heavily supported by the analysts at the major investment banks.

Consumer Discretionary and Staples

Stores are open and once more retailers are reporting a surge in sales as retail therapy resumes as a pastime. The recent October retail sales surged 4.9% MoM more than doubling estimates and increasing by the most since November 2020. Retailers have outperformed this year but face a range of inflationary pressures looking ahead with labour shortages bringing wage pressure and international supply chain disruptions eroding margins. The resumption in international travel will also reduce wallet share in the year ahead.

Property

The Real Estate index has outperformed the broader market notably over the second half of the year. Groups focused on funds management are upgrading earnings for FY22 and recent property sales have underpinned the strength in commercial real estate market post lockdowns. With the next trading updates in February the momentum is there but further price gains will need fresh transactional news as individual share prices have enjoyed solid gains and maybe susceptible to profit-taking.

Communication Services

Events of the last 18 months have only fast-tracked digitisation of everyday life. With the NBN complete and 5G mobile rollout the focus, Telstra is significantly in front of their competitors. The company advertised has 5G coverage of more than 75% of the Australian population as at June 2021. Telstra expects to not only expand coverage to 95% by 2025, but also to double metro sites and add an additional 100,000km2 to their regional coverage.

Digital infrastructure providers like NEXTDC (ticker NXT) are key suppliers into the digitisation theme and will continue to benefit. NXT has nine operational data centres across Australia and two under construction. While a thematic investment given current valuations, the strong growth outlook and continued migration to the cloud will continue to attract investor attention.

In summary, the risk appetite will remain while rates are low and the geopolitical picture remains stable. As vaccinations progress throughout regional Australia, we can look forward to rebounding economic activity continuing and perhaps even a visit to Western Australia in 2022.

The views expressed in this article are the views of the stated author as at the date published and are subject to change based on markets and other conditions. Past performance is not a reliable indicator of future performance. Mason Stevens is only providing general advice in providing this information. You should consider this information, along with all your other investments and strategies when assessing the appropriateness of the information to your individual circumstances. Mason Stevens and its associates and their respective directors and other staff each declare that they may hold interests in securities and/or earn fees or other benefits from transactions arising as a result of information contained in this article.