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Here are the aussie stocks i’m backing

Team Australian is worth backing. We beat the virus, now we reap the rewards. I encourage you to consider some more domestic cyclical exposure in your portfolios.

After periods of extreme economic and market volatility it’s very easy to believe that things will never be the same again. It’s also very easy to become bearish and pessimistic about the future. 

From my experience neither of those approaches generally proves accurate and the economic and market world returns to normal far quicker than most people expect. 

I remember post 9/11 in 2001 and during the GFC in 2008 that the consensus view was the world would never be the same again and the economic recovery, if there even was to be one, would be very painful and arduous. 

Fast forward to today (pre COVID-19 world) and outside of airport security and banks holding more regulatory capital, there are very few differences to business or consumer behaviour post 9/11 and the GFC. Time did heal pretty much all wounds and the world reverted to growth and risk taking because central banks made liquidity so widely available at a record low cost. 

It could well prove that the COVID-19 “bear market” of March and associated record collapse in economic data and employment, will prove just a blip on long-term charts. The more we head towards a broader reopening of the world economy the more likely this seems correct. 

Why do I say this? Because this market, economic and employment collapse was self-inflicted. It was in response to a virus, a virus that is passing and eventually will have a vaccine. 

While I run a global fund, today I thought I’d write about Australia and Australian equities because, despite Australia handling COVID-19 better than just about every other first–world country outside of New Zealand, the ASX200 continues to underperform global peers. Will this persist, or is there selective opportunities in Australian equities? 

The bear case I hear about Australia and Australian equities is “when the Jobkeeper stops and the banks start charging interest on mortgages again, the economy and market will tank”. There are also concerns about rising tensions between Beijing and Canberra. 

Firstly, let’s be clear the coordinated actions of “Team Australia” were outstanding in a global context. Federal and State governments acted quickly and decisively in concert with the RBA and major banks to save us from a much, much worse health and economic outcome. They bought us time through a medical emergency. They effectively pumped high doses of economic morphine into the economy and in my view, they did an excellent job. 

If you think I am wrong in this view, just look at how badly the United Kingdom handled COVID-19. It was and remains a debacle of the highest level because leadership dithered and lacked coordination. There was no “Team UK” as such and they have paid a very dear health and economic price that won’t be easy to recover from. 

On a global scale Australia looks outstanding in terms of how we handled COVID-19. This is most likely the key reason our national share price, the Australian Dollar, has recovered +25% from March lows to be basically flat for the calendar year. 

Credit must be given to Federal and State leadership, the Reserve Bank of Australia, our medical experts and the leadership of corporate Australia. Team Australia passed the stiffest test of the last 100 years and in my view, Australia is well placed to recover quicker than most from the economic downdraft of “lockdown”. 

Of all the economies I look at globally, I believe Australia has the greatest chance of the so-called “V-shaped economic recovery”. Australians, somewhat unexpectedly, did what was best for the community and strictly obeyed lockdown instructions. The population’s behaviour was a key part of Team Australia being a success. 

But in my conversations and observations I feel a real willingness in the community to get back to work, make some money, and take some risk. 

We have all had plenty of time to reflect and I suspect one reflection we’ve all had is “how good is Australia”. I suspect, firstly, that many ex-pats who returned from overseas won’t go back. I also suspect many expats still living overseas will return permanently to Australia. I also suspect many who had considered leaving our shores will reassess. Worries about Australia’s potential population growth are misguided because just about the whole world is envious of Australia right now and many will come to live here. Population growth is a vital ingredient in GDP growth and obviously vital in the demand for housing. 

For all the bear stories about rising inner city vacancy rates in rental properties because international students have gone home, I feel the much larger story will be the demand for Australian citizenship from all over the world going forward, plus as I mention above, the return of many of our 1 million expats. I doubt those rental vacancies will remain high for long. 

Australian’s are a naturally confident bunch and I believe our animal spirits will return quicker and stronger than most believe. 

The ONLY missing ingredient right now is confidence. People are still a bit shell-shocked, but they will realise the worst is behind us and then move quickly to spend and take risk as they regain confidence. 

That day is potentially much closer than we believe. While we won’t open our international borders anytime soon, and rightly so, internally we will have open state borders and that combined with a lifting of all social distancing restrictions should see a jump in both consumer and business confidence. 

Australian’s will spend disproportionally in Australia and that will be a good thing for the potential V-shaped economic recovery. 

The fiscal and monetary policy taps are turned fully on. In fact, this is the full floodgates from Canberra and Martin Place which dwarfs any response to the GFC. This is MASSIVE fiscal and monetary policy stimulus for what will prove a transient healthcare event. 

That’s what we all need to remember. When we aren’t talking about the virus, we will be left with fiscal and monetary policy stimulus that is long-lasting. While I describe it above as morphine, it’s such a massive and unprecedented dose that its effects will be felt for years, if not decades in terms of infrastructure upgrades that have been brought forward. 

Unemployment is a lagging indicator and its already bottomed. Forget looking at it as a guide to the future. If unemployment has bottomed, then in my view it’s fair to say it’s likely the all-important Australian bank sector has bottomed. 

The same can be said for the discretionary retail sector and the building materials/equipment sectors. 

Money has never been cheaper and government spending has never been larger. That is a very supportive combination for cyclical elements of the Australian equity market, but particularly those that only operate in the domestic economy as it may well prove Australian GDP growth recovers faster than the rest of the world. Similarly, the AUD may prove more resilient than many think and lead to offshore earners underperforming. That is the opposite of the last 5 years where global earnings were an advantage on the ASX. 

If any of what I describe proves accurate then the sectors I think do the best in Australian equities are generally described as “value” and broadly out of favour right now. They are cyclical, and cyclicals are what we lead the market out the other side if my view of a V-shaped recovery in Australian GDP proves accurate. 

By the end of the September quarter Australia will be emerging, hopefully strongly, from this technical recession that was forced upon us by COVID-19. As the data improves you will see domestic cyclicals lead the ASX. 

On that basis if I ran Australian money I would be increasing my holdings in all four large cap Australian banks (ANZ,CBA,NAB, WBC), increase my holdings in discretionary retailers, led by Wesfarmers (Bunnings), JB Hi-Fi (JBH), Harvey Norman (HVN) and even Scentre Group (SCG) as people will return to shopping malls. 

The final sector I would increase my holdings in would in those will exposure to would be those with exposure to infrastructure construction. Those include Seven Group Holdings (SVW) (which owns Caterpillar, Coates Hire and 10% stake in Boral), Boral (BLD) itself before it exits its trouble North American business and becomes a pure play Australian exposure and Lend Lease (LLC). 

Perhaps it’s time to sell the defensive infrastructure play Transurban (TCL) to fund rotation to cyclical infrastructure construction plays. It’s worth noting TCL weren’t part of “Team Australia” in any way I could see, still charging tolls on all roads even to essential workers. I don’t think that was great corporate citizenship, but so be it. I see greater upside in infrastructure construction stocks than TCL form this point. 

After the gloom comes the boom. I believe the fiscal and monetary policy settings are in place for Australia to experience and economic boom that sees that GDP ground lost in COVID-19 rapidly recovered. 

Team Australian is worth backing. We beat the virus, now we reap the rewards. I encourage you to consider some more domestic cyclical exposure in your portfolios. 

I haven’t written this in many years…Go Australia!