3 catalysts that could help ‘underpin’ ASX returns despite the impact of lockdowns
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For the most part, ASX investors have shrugged off the hit to economic growth caused by the greater Sydney lockdowns.
The ASX 200 rose by around 1.1% in July and another 1.9% in August, and is currently trading near new all-time highs.
Gains at the big end of town were helped along by a bumper reporting season, as record iron ore prices and strong operating conditions flowed through to healthy profits and big dividend payments.
However, indefinite lockdowns on the east coast left many companies less optimistic about the year ahead, said the UBS equities team.
Across the ASX 100 41% of companies in the ASX 100 beat their full-year earnings per share (EPS) guidance for FY21, UBS said.
But in terms of forward guidance — which is arguably more important than historical full-year results — only 17% of companies beat expectations, a figure which is “well below the average of previous years”, UBS said.
Breaking it down by sector, UBS is more bearish than the market on the outlook for the big resources companies, as iron ore prices turn volatile following a record rally above US$200/tonne.
The bank’s EPS forecasts for insurance and consumer staples (which includes the supermarket giants) are also below market consensus.
However, UBS is more bullish on media, gaming and utilities and REITs (real estate investment trusts).
Yesterday, listed group Centuria Office REIT (ASX:COF) flagged that it’s still bullish on the post-lockdown outlook, with news it was snapping up two new office properties in Sydney and Melbourne for $273.1 million.
And if and when Sydney and Melbourne can extricate themselves from the grip of the Delta variant, UBS reckons there’s still some upside for equities tied to the “re-open” trade.
COVID-19 lockdowns in Australia’s two largest cities will undoubtedly result in a sharp contraction to economic growth in Q3.
But that’s not a necessarily a catalyst to hit the sell button, if the post-COVID experience is anything to go by.
The June quarter in 2020 saw record declines in GDP across every global developed economy, while stocks tracked steadily higher.
And UBS flagged three reasons why the domestic policy response might contribute to a similar scenario.
For starters, fiscal support “is now around $3bn per week, above the lockdown cost of around $2bn per week”, the analysts said.
At the peak of the pandemic panic in March last year, fiscal support was the only catalyst that finally put a floor under equities, following a historic market selldown.
In addition, more people stuck at home means another jump in the savings rate, which has already surged higher.
Extra household savings now account for around 14% of Australia’s annual GDP, UBS said. And as the economy reopens, the household savings rate should drop as demand picks up, helping to spur broader activity.
Lastly, they assessed the health outlook. While Australia was late to the game in its vaccine rollout, increased urgency in NSW has resulted in a sharp uptick in vaccination rates.
“Indeed, vaccination rates should hit the ‘magic number’ (of 70%-80% of adults) for lockdowns to ease significantly from October,” UBS said.