Market Commentary – December 2020

by Chris Limberg on Dec 31, 2020

Year in Review – From Despair to Optimism

2020 was a challenging year with Covid-19 the bushfires, floods, drought and storms dragging the Australian economy into recession for the first time in 28 years. These events conspired to drive the biggest economic contraction in Australia since the end of world war 2 of 7%. However, due to the speed and size of economic stimulus our economy also experienced its largest growth rate of 3.3% in the September Quarter, the fastest expansion since 1976. The ASX 200 closed 6,587 points down 1.5% for the year.

December Quarter Review

The December quarter saw the ASX200 rally strongly closing at 6,587, up 13.2% for the period. The market responding to easing concerns regarding:

  • the election of Joe Biden in the US
  • development, availability and rollout of vaccines
  • stabilization in Australia/China trade relationship

Current State of Australia

The Australian economy has thrived in the last six months braced by the effective management of the pandemic to date. The swiftness of the stimulus package has softened the predicted unemployment highs with December seeing a fall to 6.8%. The Reserve Bank of Australia continues to support the economy cutting the official interest rates to 0.1% pa and remains committed to the accommodative interest rate for at least 3 years. However, economists are already speculating about the return of inflation and whether this will drive up the interest rate, albeit with no evidence as latest inflation was 0.7% pa well outside the targeted 2-3% pa.

The next six months will be a crucial time for unemployment as JobKeeper payments are due to stop on the 28th of March baring any extension. We remain cautious on the outlook for unemployment around this transition period.

House prices remain buoyant continuing to record small monthly increases. There are however some clouds on the horizon with uncertainty around employment, population growth slowing from smaller family sizes coupled with closed boarders and approval for home loans now at pre COVID levels.  

Portfolio Positioning

We are pursuing a conservative exposure to equities. The ASX 200 has performed strongly however underlying metrics suggest valuations are stretched much like a rubber band under tension. For reference the Price Earnings ratio or earning multiple (i.e. a measure of how long the earnings take to equal the price paid) of the ASX 200 since 1980 averages around 15 the market is currently trading on a ratio higher than 50 times. In other words, it will take the market more than 50 years for the profits to equal the price paid today. Given this outlook we are looking to maintain the cash holding in portfolios and being highly selective with our stock exposures.

Terry, Chris and Kieran of Limberg Asset Management would again like to thank you for your enduring confidence and trust in our financial management in what has been a very difficult year for all. We are interested in talking with anyone you think may benefit from our services and would appreciate your assistance with referrals.