The S&P/ASX 200 (INDEXASX: XJO) is following the lead of US markets to push higher on Wednesday as we venture into a new financial year.
How did financial markets end the quarter?
Sharemarkets around the world continued to rally overnight. The S&P 500 rose 1.5%, marking the strongest quarter since 1998. The Eurostoxx 50 was comparatively weaker, adding just 0.06%, whilst the Nasdaq rallied another 1.9% as investors ignored the existential threat to Facebook Inc (NASDAQ: FB). The primary driver was an improvement in consumer spending, with smaller companies a key beneficiary.
The ASX 200 finished a similarly strong quarter, up 1.4% for the day and 16.2% for the quarter. Over the financial year, however, the benchmark index slumped 10.8%, which was the worst financial year return since the GFC.
The standouts for the quarter were the IT sector (+48.7%) lead by Afterpay Ltd (ASX: APT), Consumer Discretionary (+30.1%) thanks to Wesfarmers Ltd (ASX: WES), and Energy (+28.2%). The likes of Santos Ltd (ASX: STO) and Woodside Petroleum Limited (ASX: WPL) finished the day up more than 5% as most of the world showed signs of successful reopening, outside the US at least.
Reporting season in focus
With most companies completely removing any earnings guidance due to COVID-19, this stands out as one of the most interesting and difficult reporting seasons in history.
Collins Foods Ltd (ASX: CKF) was the last company to deliver an earnings update for the financial year, confirming a 5.1% increase in net profit to $47.3 million as those stuck at home flocked to the home delivery service available from its KFC and Taco Bell stores throughout the country. The Collins Foods share price led the market, adding 12.7% for the day.
One issue to watch out for come reporting season is the reassessment of asset values, particularly those of oil companies around the world following the collapse in the oil price. Think Santos and Woodside. This comes after Royal Dutch Shell Plc (AMS: RDSA) wrote down the value of their assets by another $20 billion overnight. For me, this is a sector that carries far too much uncertainty to hold at the current time.
Looking to the future
By far one of the most powerful and interesting themes I’ve been using in my portfolio is that of e-commerce and the growing focus on supply chain efficiencies.
On Tuesday, we saw Amazon.com Inc (NASDAQ: AMZN) sign a 20-year lease with a Joint Venture between our own Brickworks Limited (ASX: BKW) and Goodman Group (ASX: GMG) for a huge 191,000 sqm fulfilment space in Australia as they seek to continue ramping up domestic operations.
On the economic front, the Chinese economy showed signs of life, with factory activity picking up post the COVID-19 lockdowns and actually moving into expansionary territory.
I’m writing to clients this week as we undertake our quarterly review and my one key strategy for 2020 and beyond is ‘challenge everything’. It’s time to forget about the companies that performed pre-COVID, move on from dividends and begin investing for the future, by challenging our views on what we believe are the companies best placed to grow in a very different environment.
This report was written by Drew Meredith, Financial Adviser and Director of Wattle Partners. To get in contact with Drew, click here to visit the Wattle Partners website.