Banks back in favour as markets move from 'hope' to 'growth'

The “return to normal” in Australia, and likelihood of a COVID-19 vaccine, means markets  are now moving from a “hope” to a “growth” phase, say investment managers from SG Hiscock & Company.

Hamish Tadgell, Australian equities portfolio manager, said the huge coordinated policy response from central banks and governments supported a more sustainable growth recovery for equity markets.

Tadgell said Hiscock had tilted its portfolio to capture this shift—a strategy that includes a reweighting to banks the first time in almost a decade.

“Following the fastest despair phase in history, we have experienced one of the strongest hope-based recovery phases we’ve ever seen,” Tadgell said in a briefing on Tuesday.

“On average, it has taken around three years for the market to return to its previous peak earnings level following a downturn. However, the event-driven nature of this crisis, coupled with the paradigm change in fiscal policy support and rise in household savings, makes it very different to the post-GFC recovery.  This  provides the potential for a much  faster return to pre-crisis earnings.

“We are currently tilting our portfolio to capture the shift from hope to growth and in particular seeking to reallocate more towards quality cyclical companies that will benefit from the return to normal. This includes energy companies such as Lendlease (ASX: LLC), Woodside Petroleum (ASX: WPL) and Cooper Energy (ASX: COE), and we’ve also increased our weighting towards banks, which are now at our highest level in over 10 years.

"Our portfolio has historically had a very underweight bank position and it's probably one of the highest bank weights that we've had for probably close to 10 years," Tadgell said. The S&P/ASX 200 Banks Index rose 17.2 per cent in November.

"If the economy starts to look better [and] growth starts to pick up, banks are leveraged to GDP growth ultimately.

"If the economy looks better and unemployment looks better than what was expected then bank provisioning should be lower."

Tadgell singled out opportunities in other sectors. Energy stocks were “very, very cheap”, particularly gas producer Woodside, which Tadgell noted is at a 16-year low on a cost per barrel basis. Gas will be in high demand in China and Japan as it is a strong "transition fuel", he said.

Elsewhere, gold miner Saracen Minerals (ASX: SAR) had been bolstered by the proposed merger with Northern Star (ASX: NST), which Tadgell described as a wonderful asset.

Buildings materials supplier James Hardie Industries (ASX: JHX) was well positioned and doing well from the US housing recovery.

Opportunities existed in smaller companies too. In telecommunications, Uniti Wireless (ASX: UWL) would benefit from its fibre networks to housing estates and was now effectively the number two player to the NBN and had a strong growth profile. "It can sell wholesale and retail, which the NBN cannot do," Tadgell said.

Another on Hiscock's list is Carbon Revolution (ASX: CBR), which makes carbon fibre wheels and is a supplier to brands such as Ford and Ferrari.

How Morningstar sees some of SG Hiscock’s picks

Source: Morningstar Premium

Tadgell said the US election had been a key catalyst for the upbeat outlook, along with recent vaccine news for markets to push higher. 

“A Biden victory and Republican controlled Senate has been embraced by markets.  However, we are keeping a close eye on the run-off elections in Georgia in the US.  If the Democrats were to win, this could see them control the Senate and raise concerns of a more radical legislative agenda and less market friendly regulatory reform.

“In addition, the February reporting season in Australia will be very important. It is not uncommon for there to be some bumps in road as the economy and markets transition from hope to growth and reality takes time to catch-up to expectations. This may see some temporary recalibration of expectations for certain stocks and sectors after such a strong run.  But overall, we see the drivers for a pick-up in earnings growth remaining intact,” Tadgell said.

Tadgell urged investors to remain vigilant as uncertainty remains around the timing of a vaccine and the duration of the virus.

The SGH20 Australian equities fund, which is outside Morningstar coverage, invests in a concentrated portfolio of Australian stocks that aims to offer long-term returns in excess of the S&P/ASX 300 Accumulation Index (after fees).

It has a minimum investment of $20,000; a management fee of 0.90 per cent; and distributions are paid twice a year.

 See also Morningstar Guide to International Investing