Dermot Ryan
We are charged with generating income for our clients and we think now is a crucial time for clients to reassess where their portfolios are positioned in the high-income area of Australian equities.
It was only in March that, some days, local markets would be down by 8-10 per cent on the market open, following some difficult overnight moves in the US. Now, markets are trending upwards, and we are around bull territory (+20%) compared to the bottom we saw about five weeks ago. This is a reminder that humanity has, and will, continue to prevail. It also reaffirms the old adage: “buy to the sound of cannons.” Though there is much that is unfamiliar – physical distancing and isolation especially – markets will be markets, and they always turn. We believe investors in the market at the point of recovery are best placed to capitalise.
As I explained in a recent podcast with market analyst at CommSec, Tom Piotrowski1, we’ve been rotating through markets over the last few weeks, as we can now see some value return to domestic markets. Some examples of the moves we’ve made, and the strategies behind them, can serve to assist investors who take a long-term view to generating income.
For context, in the February reporting season just before the COVID19 lockdown, we saw lacklustre performance for profits at an aggregate level and a tepid economy hit by bushfire disruption. Because of that, we were already positioned in what we saw as defensive stocks in industries like utilities, infrastructure, and supermarkets. We continue to believe there are good dividends to be had in essential services, but there are some very interesting opportunities turning up in the volatility.
As the market crashed, we began to rotate into more cyclical sectors, and took part in a number of capital raisings, even in some cases buying stocks that had been cut to zero but had the potential to be strong payers in normal times. As I said, we are charged with generating income for our clients, and in our view those companies were making prudent moves to bounce back, ultimately rewarding their investors. As always, we focus on the fundamentals: good management, strong balance sheets, and the ability to trade through a severe revenue disruption.
Hard to believe as it might seem, there are also some sectors that are relatively unaffected by the COVID-19 disruption. We believe dividends are very likely in some infrastructure sectors, like pipelines and transmissions, because they continue to experience normal functioning.
As I’ve said before, we think the banks are having a tough time, which is not surprising given they are not currently in a position where they’re generating a huge amount of organic capital. We forecast that aggregate dividends would be down by over a half and we have seen that come through since. In saying that, it’s important to remember that this won’t be forever either, and that Australian banks are moving into this crisis in a stronger capital position than they were during the Global Financial Crisis.
Further, Australia should be able to reopen quicker than most overseas companies. We’re not out of the woods yet, but Australia is in an enviable position on the global stage. We are among the top countries in the world for infection control , which forms part of the reason why we think domestically focused stocks will do well in the rebound. Some turning points we will be monitoring include how quickly state governments foster a return to regular activities, as a starting point. Other things we are monitoring for signs of a pick-up in local markets include spikes in domestic tourism and credit card expenditure.
For pre-retirees and retirees, this is of course a deeply stressful period. Hopefully there is comfort in knowing that already, the end is in sight, there are options on the table, and that markets have always recovered. Even with the temporary cuts to dividends, Aussie equities are still topping the table of income options for domestic investors and we believe they have the potential to grow capital over the long term. We also stand by our view that being properly diversified and set for the next cycle is a key part of being ready to capitalise on opportunity.
For more information about the AMP Capital Equity Income Generator Fund click here >>
Author: Dermot Ryan, Co-Portfolio Manager (Income), Sydney Australia
Source: AMP Capital 8 May 2020
Important notes: ipac asset management limited (ABN 22 003 257 225, AFSL 234655) (ipac) is the responsible entity of the AMP Capital Equity Income Generator (Fund) and the issuer of the units in the Fund. To invest in the Fund, investors will need to obtain the current Product Disclosure Statement (PDS) from AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232 497) (AMP Capital). The PDS contains important information about investing in the Fund and it is important that investors read the PDS before making a decision about whether to acquire, or continue to hold or dispose of units in the Fund. Neither AMP Capital, ipac nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this document. Past performance is not a reliable indicator of future performance. While every care has been taken in the preparation of this document, AMP Capital makes no representation or warranty as to the accuracy or completeness of any statement in it including without limitation, any forecasts. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. Investors should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to their objectives, financial situation and needs.
This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.
