08 December 2020
This report has been prepared by Northcape Capital, the underlying investment manager for the Warakirri Ethical Australian Equities and Warakirri Concentrated Australian Equities Funds.
The Australian equity market recorded a positive return up 10% in November, rallying on Covid vaccine news and RBA QE/rate cut driven optimism. Global equity markets posted a similar increase in share price rises. Greater certainty around the US election result earlier in the month was viewed positively by investors, however it was the incremental positive vaccine news that was the key driver of the global rally in stocks. Two companies announced vaccines with over 90% effectiveness providing investors with some confidence that there is a clear line of sight to the end of the pandemic and a full reopening of the economy.
The strong rally in markets in November were characterised by a rotation to the sectors / companies that were most impacted by Covid. Travel related companies such as Webjet (65%), Flight Centre (52%) and Corporate Travel (37%) were amongst the stronger performers over the month. Energy stocks (28%) also rallied in line with a rise in oil price, a beneficiary of increased economic activity (especially flights and cruises). Financials (16%), driven by the banks, also rallied.
The banks have enjoyed a rebound from depressed levels on a better economic outlook, however we remain concerned about the outlook for returns over the medium term. We think controlling costs will be critical for banks given a weak outlook for revenue.
Value stocks (16%) outperformed growth (4%) by a significant margin over the month. This was not surprising given the value section of the market included more companies that were impacted by Covid and have lagged in the recovery.
Stocks that are beneficiaries to the reopening of the economy performed strongly. In the portfolio this was seen in our travel related names such as Qantas (28%) and Sydney Airport (23%), as well as IDP Education (27%), REA Group (23%) and Beach Energy (49%).
Stocks in Focus
Fisher & Pakel Healthcare: Permanent changes in clinical practice within the hospital setting offer a structural tailwind to Fisher & Paykel Healthcare’s consumables sales to aid in the treatment of respiratory distress. The recent relative de-rating of FPH’s share price offers an attractive buying opportunity in our view.
Nuix was added to the Approved List and a position was initiated during the pre-IPO process due to a positive assessment of their competitive positioning in their core markets of ediscovery and digital forensics and the upside optionality available in burgeoning adjacency markets like risk and compliance. Since then, significant share price appreciation (~+70% in 2 days) has led to an exit of the stock given the resultant change in assessment of the risk reward skew.
With the past month dominated by macro sentiment and market moves we ask ourselves what next? The near-term direction of the market is always subject to the influence of unexpected events. For example, this time last year a global pandemic was not on forecasters’ radars. That said we are reasonably optimistic about share market conditions.
The roll out of effective vaccines should increase activity in Australia and throughout the world, particularly in the service sectors. When combined with fiscal and monetary policy settings that are supportive in all major economies, conditions appear right for asset prices to make further gains during 2021.