Private Wealth: Market Update


Updated December 14th 2020

Paul Israel

In this update we examine the outlook for shares, and focus on the healthcare sector

Outlook for Australian Equities

  • The broadly based stimulus program and early success in controlling COVID-19 has facilitated a 37% rally in the ASX200 from March lows.
  • Extension of the stimulus program should underpin corporate earnings trends
  • EPS forecasts have turned positive with upgrades exceeding downgrades
  • Contributors to upgrades have been Consumer related, Healthcare, Transport/ Logistics, and Materials
  • Low interest rates continue to be supportive for equities, along with low inflation
  • Near term, COVID-19 problems in Victoria and NSW serve as a “headwind” for the ASX200
  • For the ASX200 to move higher, progress on developing a vaccine is likely needed

A common concern remains that the rebound is irrational. How can shares be so strong when June quarter GDP declined by an average of -10% in developed countries and an estimated -7% in Australia.

But as the investor Sir John Templeton once said: “bull markets are born on pessimism, grow on scepticism, mature on optimism and die of euphoria” and we have certainly seen the run up since March occur against the prevailing backdrop of pessimism.

It is worth noting that the All Ordinaries Index is still approximately 11% below its 2007 high made 13 years ago, despite the Australian economy (GDP) being 65% higher than what it was then.

Key risks and Mitigations

COVID, in the absence of a vaccine, will continue to be a risk. As activity returns to normal, there will be clusters of outbreaks, however these should be contained at a local or state level. The second wave of new coronavirus cases in developed countries has been far less deadly than the first. This likely reflects more young people being infected, better testing, better protections for older people and better treatments. This in turn has seen most countries avoid a return to a full lockdown and limited the
hit to confidence.

The World Health Organisation have stated that ideally there would be multiple vaccine’s that are proven safe and effective. As at 31 July, Globally there are 26 vaccine candidates in clinical evaluation. 5 of the 26 have progressed to Phase III clinical trials and are considered highly promising including;

  • Oxford University/ AstraZeneca – both parties operating on a not for profit basis. Currently being trialled in the UK, South Africa, Brazil and about to commence in the US and India. Said to have produced promising immune response, and no adverse safety events. Australia to distribute at least 25 million free vaccines if trials are successful.
  • Moderna/NIAID – trial with up to 30,000 participants. Moderna stated on track to deliver 500 million doses per year beginning in 2021.

Healthcare is likely to see substantial attention and investment post COVID

Healthcare has offered low volatility and attractive long term returns, with most developed countries having seen their expenditure on healthcare double over the past 40 years.

We believe the pandemic is a catalyst for the continued long-term performance of the healthcare sector. Long-term tailwinds that are likely to gather momentum in the coming years include:

  • A growing and aging population. According to the United Nations, there were 703 million people aged 65 or over in 2019. This number is projected to more than double, reaching over 1.5 billion persons in 2050. Life expectancy is also continuing to rise with many developed countries approaching 80 years. This combination of increased longevity and aging demographic will have a profound impact on healthcare expenditures since demand rises rapidly with age.
  • A fast- growing middle class, particularly amongst emerging markets in Asia. Healthcare is a superior good with a low price elasticity of demand. As income increases, the healthcare share of total consumption will increase. The global middle class is expected to grow dramatically over the next decade. The Brookings Institute estimates that the world’s middle class population will rise from 3.6 billion to 5.3 billion by 2030, with the bulk of the increase coming from the Asia-Pacific region.
  • Chronic Disease. Sedentary lifestyles and other elements of modern society will keep chronic diseases prevalent for years to come. They contribute to higher rates of obesity, diabetes, and heart disease while age related diseases such as Alzheimer’s are also more prevalent today than in the past. The enormous economic cost and lost productivity due to chronic disease has a flipside in the huge incentive for medical innovation and payoff from medical research and development.

Investment Strategy

We retain our defensive strategy based around holding companies that have reasonable earnings predictability, sustainable cashflows, reasonable balance sheets and management capable of generating consistent returns on capital. Our focus is on sectors with attractive, sustainable growth prospects including healthcare (CSL, Ramsay, and Resmed), retail staples (Coles, Woolworths, and Wesfarmers), infrastructure / logistics (Transurban, Goodman Group) and resources (BHP, Northern Star).

Please let us know if we can be of any assistance, or you would like to discuss.

For more articles, see our Summer Bulletin