2007 highs in sight, can it be beaten and how to buy in
The March lows from the impacts of coronavirus spelled the sharpest correction experienced in decades. Yet from this fall, we are experiencing a recovery almost as sharp. Spurred by fiscal stimulus, revised positive earnings and reopenings nation-wide, the market continues to grind upward.
With a US election looming and growing impatience for a coronavirus vaccine, can the market continue to grow and soon reach the highs of the 2007 bull market?
In this thematic, Jason Kururangi from Aberdeen Standard Investments and Catherine Allfrey from WaveStone Capital determine the catalysts needed to reach these market highs, 4 stock picks to take advantage of this growth and whether they see new market highs coming in the next 12 months.
Notes: Watch, read or listen to the discussion below. This episode was filmed on 21 October 2020
Matthew Kidman: Welcome to the thematic discussion, brought to you by Livewire Markets. Today, we are going to dream a little. We're going to think about how the market can go higher. That's right. A market can actually go higher. We're not going to worry about it going down, we're going to work out how it's going to fly through that old high, 6,800 and break a 13-year drought. Can you believe it? 13 years on, and we still haven't breached that November, 2007 level.
And to talk about how it's going to happen, I've got Jason Kururangi from Aberdeen Standard and Catherine Allfrey from WaveStone.
Catherine, I'll start with you.
Catalysts to break the 2007 market highs
Matthew Kidman: What does the market need? What are the couple of factors that are going to see us break out of this lock that we've been in for a while and take us higher, especially now that we're in a recession?
Catherine Allfrey: We need earnings growth to return. And in the last six weeks, we've started to see positive earnings revisions in the Aussie market, which is a really good sign. Up until now, because of COVID, we've just been in this negative earnings revision for many sectors, right? We've had the multiple expansion with the market. We now need the earnings to come back.
So, we're just starting to see it in some of the top 20 stocks, the banks have gone into positive earnings revision, iron ore obviously has been as well, quite positive. CSL, just upgraded earnings. We have quite a few companies have come out and upgraded and so that's a positive sign. That's what we need, earnings back. But we also need a vaccine. Clearly the market will love a successful vaccine. That would be a real positive for the market.
Matthew Kidman: Okay, Jason.
Jason Kururangi: I agree wholeheartedly with what Catherine's just said. The big one for us is some positive news flow globally around the vaccine. The election cycle in the US, as well, if we can get a positive outcome there. If we get a consistent government that can execute on some fiscal stimulus policies, a more wide ranging and probably more cohesive government across the various houses of Parliament over there.
And then also, the third element I would say domestically, is a recovery from Victoria. As we start to see Victoria open up, I think that will provide a big boost to a lot of companies. So I think broadly, it's pretty similar themes to what Catherine said.
Sectors set to take off in the event of market highs
Matthew Kidman: Okay. Let's stay with that. Let's say the Victorians come out to play, let's get a vaccine, let's see some earnings growth, what then takes off in the market that drives us higher? Because the Aussie Index is pretty concentrated, what's going to take us there, if all that good stuff happens?
Jason Kururangi: I think there's probably a couple of big ones in the Large-Cap Index, the ASX 200, if we were to look at the two sectors that have massively underperformed this year would be financials, banks specifically, and energy stocks. So, if we could see an improvement in commodity prices globally, particularly oil and gas, then we'll see a recovery in that.
Also in banking, if we get a resolution of where the bad debt cycle looks, and it looks like we're muddling on through and people are getting more comfortable with the banks.
And then probably a third one, something like a Tyro Payments, which they're very leveraged to payment volumes and the economy. When Victoria reopens and we start to see people out and about spending and supporting hospitality, then that should get a real boost.
Matthew Kidman: Don't use all your stocks up yet because we'll come back to that. Jason's talking about a bit of black magic there, oil, gas, banks, these things just don't perform. Stay short those for the last five years and you're a winner.
So what are those things that are going to take higher? Is he right? Are we going to get into that black world of things that we thought we didn't have to invest in any more?
Catherine Allfrey: Look, I think energy could take a little longer. Clearly we need the world to open up, right? And with the rising count offshore, looks like that's not going to happen for some time, in terms of air traffic getting up. It's one thing to have planes flying in the sky, it's another thing for people to feel comfortable getting on a plane. So, I think that's going to take a while.
Banks are looking better, as Jason said, we're muddling through, in terms of the bad debt cycle. The number of deferred loans, which we won't really know until next year. But I think the government and the regulators are actually doing some positive things for the banking sector for a change. Whereas, the last five years it's been all one way. It's been very negative for the banks. So, cheaper funding for them, for example, allowing them to put these deferred loans on interest only, that's a real positive. Responsible lending laws being watered down. All those things are quite positive for the banks, which should support them.
Bullish or Bearish over the medium term
Matthew Kidman: Okay, we'll stay with you. That sounds like you're feeling a bit bullish. Some of those things are actually going to happen. And you brought in a few more things there, the government spending plus loosening regulation around key sectors. So are you bullish going forward in this next six to 12 months?
Catherine Allfrey: Yes, I am. I definitely am. I think we can get earnings going again and earnings recovery, and you can see even the consumer confidence number was really positive. I think the other thing that was positive in the last couple of weeks has been the finance numbers that came out. Investors have not been in the housing property market for five years, suddenly investor demand for credit is back.
I think at the end of the day to get the economy going again, we have to go back to housing, mining, these things have to move before we can reintroduce things like students in tourism again. So, we need to get those other parts of the economy going.
Matthew Kidman: Doesn't seem real though, does it, Jason, to be bullish at the moment? We're still recession and there's a huge budget deficit, trying to get us out, there's a fiscal cliff, things like this are happening, so how do you handle that and are you bullish, despite all those headwinds?
Jason Kururangi: Look, I think we would characterise it as being cautiously optimistic. There's been a really rapid recovery since March and-
Matthew Kidman: You're talking about share prices?
Jason Kururangi: Yeah, share prices, specifically. Yeah. Sorry. Share prices and that's been driven by a number of government stimuli based both fiscal and monetary policy decisions. So, there's been a lot thrown at the consumer and as Catherine alluded to, that is flowing through, into consumer sentiment, confidence. We've seen really good retail sales numbers.
So, what's going to propel the market higher and why am I sort of bullish on a 12 month view? I think, all of these things combined, as we get through, this nearer term cliff and as the stimulus starts to roll through or keeps rolling through and into next year, I think there's a good prospect that with interest rates where they are, that the market's going to keep grinding higher.
4 stocks to play the market growth
Matthew Kidman: Okay. I said, hold your stocks for a bit. I'm coming back to it now. Give us a couple that, given that nice environment where things do go right, where's the leverage and how are we going to make money, so we don't miss out?
Jason Kururangi: I'm going to go back to Tyro Payments (TYR). I think that's a big one for us. They’re leveraged to hospitality spend in trade, so in hotels. As and when Victoria opens up, people will go back to the pub and people will start spending money. That will be a big kicker for their payment volumes. They also acquired Bendigo's... or did a JV or however you want to term the structure with Bendigo recently, which should add another 20% to payment volumes and that's come out in the last few days. So, we're quite optimistic about that, on a long-term view.
And then maybe another one, maybe a little bit different, less of a domestic, but still cyclically exposed, as we see elective surgery start picking up. Cochlear (COH), should continue to benefit. They've probably consolidated the last couple of years and haven't been able to push higher, but we think there's a lot of legs to that just given the improvement that we saw in market share and globally that they were taking pre-pandemic and that'll flow through, as we reopen with more elective surgeries globally.
Matthew Kidman: Okay. Catherine, round out our portfolio. We got a couple stocks there. You can put a couple more in.
Catherine Allfrey: In the reopening trade, we like things like Sydney Airport (SYD) on the travel side. Still, I know, that's in the long-term, in terms of international travel, but at least if we can go domestic and open those borders, we can get domestic travel going, Sydney Airport will be up.
Matthew Kidman: Sounds like you want to go somewhere.
Catherine Allfrey: Yeah, exactly, I want to go back to Queensland, where I'm originally from. But we like that one.
We like Charter Hall (CHC), as well, because of the fact that universities are looking to do some sale and lease back on their properties and so we think there could be a lot of transaction activity in that area. Then next year you've got this lovely chunky performance fee coming through for Charter Hall, so we continue to like that one as well.
Will we see market highs in the next 12 months?
Matthew Kidman: Okay. Let's finish up. Give us a forecast, do you think we can get back through the old 6,800 on the All Ords that we saw in November, 2007, all those years ago, can we do it in the next 12 months?
Catherine Allfrey: If we get a vaccine, we get some more government stimulus, right? And we get corporate Australia working together, team Australia, which is exactly what's happening at the moment, we open those borders, yes. We can get there.
Matthew Kidman: You don't have to be greedy.
Okay, can you join that chorus, will it happen in the next 12 months? It's about 10 or 11% away.
Jason Kururangi: I think when you reflect on everything Catherine just said, and if you put in the fact where interest rates are, I think, yes, we can. Definitely. I don't have much more to add to that to be fair.
Matthew Kidman: So, there you have it, the only way is up for the next 12 months.
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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.