FY20 In Review: An Extraordinary Year

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FY20 will be remembered for the pandemic that changed our lives, the record-breaking highs and lows seen in stock markets and the extraordinary measures taken by governments and central banks across the world

-The ASX200 ended the year down -10.1% (-7.7% incl dividends) while gaining 16.2% in the June quarter
-Healthcare and technology lead the way in FY20
-Mining and Energy performed well in the June quarter

By Angelique Thakur

FY20: Quite a tale to tell

June marked the end of a tumultuous financial year which started out with high expectations but left us surprised (and not in a pleasant way). The first half was taken up by the US-China trade stand-off and more of Brexit, both of which dampened business and consumer confidence.

Closer to home, Australia was barely over the bushfires when we (and the world) were confronted by the coronavirus. What looked like a simple case of flu soon assumed gigantic proportions, morphing into a full-blown pandemic.

In fact, covid-19 has gained the notorious title of being the biggest threat to the global economy in 90 years. It ended Australia’s 28 years of economic expansion, with the economy contracting -0.3% in the March quarter. CommSec predicts the domestic economy will further shrink by around -8% in the June quarter.

When advice to work from home and implement social distancing was taken by some people as a cue to plan their next trip to the beach, the government had to impose stricter lockdown measures, replicated in many parts of the world, in a desperate bid to reduce cases.

These lockdowns, mostly from March to May, hit businesses and the movement of people and goods. Unemployment rose, with hundreds of thousands losing their jobs, with those working in retail and tourism sectors hit the hardest.

Companies were caught unawares and the general reaction was either one or more of the following: guidance withdrawal, raising capital, and/or deferring/cancelling earnings and distributions.

The psychological hit to consumer confidence was profound and prompted governments across the world to resort to never before seen levels of stimulus measures.

The Australian government and the Reserve Bank (RBA) also promised to do whatever it took to help restore the economy.

CommSec has put the fiscal and financial support by the state and federal governments along with the Reserve Bank at around $295bn or almost 15% of GDP.

These measures will translate to budget deficits of about -$130bn in FY20 and FY21, estimates CommSec, which is around 7% of GDP. The RBA cash rate was also lowered to 0.25% and is expected to remain there till 2022.

Even though the ASX200 has rebounded by circa 30% since the lows hit in March, the index still remains well below the February highs.

The upturn thus far has mostly been driven by central bank liquidity, fiscal stimulus and recovering activity as the economy emerges from hibernation.

Things have picked up gradually since then and while there has been a phased reopening of the economy, it is just too fragile at the moment.

Infection rates have again started to increase since the end of June, sparking concerns over a second wave of infections in the US and Australia.

ASX200 in FY20: A year of highs and lows

The ASX200 started the financial year near 6,620 points while ending it -10.1% lower with falls concentrated in energy, financials, and real estate. Total return, including dividends, ended at -7.7%.

Even though the year closed in the red, it was as good as could be hoped for amidst the unusually high volatility during the first half of 2020, which saw the index falling by as much as -36% from the highs in February.

The index had hit a high of 7162.5 in February but lost all of that and then some in the sell-off up until March 23, with the index dropping to 4,546 points.

Healthcare was up 27% and added the most value in FY20 with CSL ((CSL)) as the largest stock along with now being the largest index contributor.

The technology sector ended the year up 20%. It emerged as a major contributor to market returns in FY20 and has increased to 3.5% of index weight.

Financials were the worst performing sector, with Westpac performing worst.

The WAAAX stocks – WiseTech Global ((WTC)), Appen ((APX)), Afterpay ((APT)), Altium ((ALU)) and Xero ((XRO)) – increased by 36% in terms of market capitalisation.

The ASX All Technology Index, launched in February 2020, rose by 17% and outperformed the ASX100 which declined -11% year-on-year.

Credit Suisse highlights WiseTech Global, Afterpay, Altium and Xero have collectively doubled their weighting in the ASX 100 to 2% from 0.9% a year ago.

The best performing stock of the ASX100 was Afterpay, gaining 143% year on year and 29% month on month in June.

June Quarter: The hits and misses

Quarter-wise, the June quarter turned out to be the second-best quarter this century with the MSCI ACWI gaining 3% month-on-month, taking this quarter’s gain to 18.7%, while the ASX200 rose 2.5% over the month, rising 16.2% in the June quarter.

A second wave of covid-19 cases since early June in the US keeps the strategy team at JP Morgan on the defensive for now.

June-end saw new infections and Victoria re-imposed restrictions, highlighting the nation is not immune to a second wave despite its geographic and demographic advantages.

There are questions whether the recovery in consumer spending, already at nascent stages, will hold with new cases. The worry is further solidified by JP Morgan’s expectations of a sluggish earnings recovery across FY20-22.

Energy lagged with a fall of -2.1% on account of a tepid oil price recovery, followed by industrials, real estate and financials.

In terms of individual stocks, Commonwealth Bank ((CBA)) added the most to index return, followed by CSL ((CSL)) and Wesfarmers ((WES)) while Telstra ((TLS)) lagged.

The ASX technology index was up 5.2% versus the ASX100 which was up 2.9%.

Redbubble ((RBL)), Temple & Webster ((TPW)) and Kogan ((KGN)) were the best performers, while PainChek ((PCK)), Atomos ((AMS)) and Catapult Group International ((CAT)) were the worst.

Credit Suisse retains a positive outlook for the technology sector, but cautions valuations are beginning to look full with investors flocking to the sector post-sell-off.

Within the technology sector, Credit Suisse is Overweight on Infomedia ((IFM)), Xero ((XRO)) and Life360 Inc ((360)) in that order, and Neutral on Appen ((APX)), Audinate Group ((AD8)) and Iress ((IRE)).

Credit Suisse also has a neutral view on travel technology stocks like Corporate Travel Management ((CTD)) and Webjet ((WEB)).

Mining and energy also saw strong returns at 27.8% and 28% respectively. Banks saw growth of 5.8% but finished the June quarter underperforming the ASX200 by -5.60%.

While June saw strong consumer activity, JP Morgan economists fear this might simply be pent-up demand rather than a return to normal.

The way forward

The last four months saw negative earnings revisions, stabilising somewhat in June with earnings expectations rising 0.8% at the index level. Macquarie notes earnings expectations bottomed in early June with consensus forecasts for 2020-22 rising in recent weeks, implying a V-shaped recovery.

Companies in the Small Ordinaries saw the strongest revision with a 9.6% uplift while at a sector level, the largest upgrade was reserved for energy at 5%, followed by discretionary retail at 2.9% and industrials at 2.7%.

Macquarie points to an inordinate increase in stock trading due to a lack of better options, leading to what is famously known as the "TINA" effect (there is no alternative), leading to increase in stock values because there is no viable investment alternative.

Macquarie finds vindication of the TINA effect in the observation the ASX200 forward PE is by now trading above pre-pandemic levels.

The second half of 2020 carries the risk of withdrawal of stimulus measures in haste (although the increased volatility will reduce the likelihood of that happening), coupled with President Trump losing the US election.

CommSec analysts think the future depends on the trajectory followed by the coronavirus and how well or otherwise it is managed by governments and health authorities. 

The fate of the stock market depends on businesses returning back to normal and people returning to their workplaces, comment Commsec analysts. They predict a -3.2% fall in the global economy in 2020 followed by a rise of 4.7% in 2021.

The Australian economy is projected to shrink by -3.9% in 2020 before recovering by 3% in 2021. JP Morgan is somewhat more optimistic and expects the Australian economy to close the year down -2.5%. A decline in inward migration will affect tourism, real estate and education.

JP Morgans retains a defensive tilt and is Overweight on communications, healthcare, staples and utilities. Materials, driven by the infrastructure stimulus being deployed in China, is most preferred.

Favoured stocks include Transurban Group ((TCL)), Viva Energy Group ((VEA)), Bendigo and Adelaide Bank ((BEN)), QBE Insurance Group ((QBE)) and Charter Hall Long WALE REIT ((CLW)) while stocks to avoid include Beach Energy ((BPT)), Ampol ((ALD)) and Macquarie Group ((MQG)).

CommSec suggests the government needs to balance health risks with economic risks and expects it to extend JobKeeper in some form. Unfortunately, there is no road map that can be followed and the ultimate outcome will depend on how well the unknowns are managed.

CommSec expects the All Ordinaries index to be near 6,100-6,400 points by December 2020 and at 6,500-6,800 points in June 2021.

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