IMFG Q2 2021 Quarterly Market Update
Wednesday, July 21, 2021
Scott: Welcome to the IMFG June 2021 quarterly market update. My name is Scott Douglas. I'm a director at IFMG. Today I have here with me, Dr. Steve Garth. Steve is on our investment committee and he's going to provide some insight into what's been going on in the markets. Steve, so what have you seen in the last quarter, and 12 months? What are the things that are coming through?
Steve: I think the big thing for the quarter Scott, is really the fact that the equity market is going along so strongly. It's just hit new highs on June the 30th, and it's fully recovered from the highs just before the pandemic. In fact, it recovered in only 14 months to get back to where it was. The other thing for the quarter has got to do with inflation. It was in the media a lot. If you look at this chart, just showing 10-year bond yields, it's sort of like a fear indicator. It shows those yields going up in the last quarter, where the market has got an expectation that inflation will be higher than they originally thought. But you see the yields now coming down. And if you like, that's the market rethinking its views on inflation, and thinking that, I think inflation is probably going to stick within the RBA's preferred band of two, 2.5%.
Scott: And why do you think we've seen such a sharp recovery when we all thought it was going to pretty much...
Steve: Oh, I think the answer there has just got to do with the government support mechanisms. And, of course, what we're seeing now on the quarter as well this year, is that the vaccines have taken hold, and so there's a lot of optimism out there as well.
Scott: So Steve now, tell me about other markets. What are we seeing in our overseas markets, and the U.S. and the like?
Steve: Well, no surprise with the government stimulus, and the low-interest rates, we've actually seen markets around the world doing really well. If you look at the chart here, there's the return of bonds, which as you would expect is quite low, but in the middle is the return of the Australian, the international and emerging markets, and you can see that they've all returned between 27 and 30%. On the right you'll see the Australian and international REITs, they're the real estate investment trusts and Scott, Australian REITs are the best performing asset class in that chart, they're UP by 33% for the financial year.
Scott: And why would REITs have gone up so much when we're all working from home?
Steve: Yeah, that's a great question. First of all, keep in mind REITs were the hardest hit during the middle of the pandemic in, you know, March last year. So it's no surprise then that they're one of the best performing asset classes, but nonetheless, people are a little bit amazed that they're doing so well when there is a work from a home culture that will certainly continue into the near future as well. But I think you have to keep in mind that when you're talking about real estate investment trust, those big tenants particularly, they sign long leases.
Steve: And, of course, Scott, that REITs are just not only commercial property. It's also shopping centers, it's warehouses, it's a whole other supply pool of real estate investments.
Scott: Right, okay. Steve, so with the overseas markets, we've seen a dramatical out-performance of overseas, particularly the U.S. compared to Australia, what have been, like, the key drivers or reasons behind that happening? Is there, I mean, some specific sectors or factors that are [crosstalk 00:03:34]
Steve: Yeah, Scott, good question. If you look at the chart here, it does show the difference between the U.S. market than the Australian market, just in the last 12 months. And you can see the U.S. market's doing better. I think the main reason for this, of course, is that in the U.S., IT and communications, they make up about 40% of the market, where in Australia, our market is made up of financials and resources. Now financials have done well, both here and overseas, but the IT sector continues to do really well. And it's a big part of the U.S. market. And therefore, It's a big part of the global market, to a large extent driving those global returns you've seen.
Scott: What sort of companies are we talking about over there?
Steve: So the IT and communication services companies are sort of collectively known by the acronym FAANGs, which stands for Facebook, Apple, Amazon, Netflix, Google, and there's a few others in there, like, you know, Microsoft and Tesla as well. Now, these companies were doing well before the pandemic, but they've all benefited from the pandemic, particularly with the work from home culture that we're seeing now. So these companies have been doing well, and continue to do really well.
Scott: And in Australia, we just haven't got that same content of organizations?
Steve: That's right. In Australia, the IT sector makes up about 4% of our overall market. Again, our market's driven by mining and banks.
Scott: Right, okay. So Steve, so what we've seen is some great numbers over the last 12 months that we really didn't expect, and the IMFG philosophy has been to have a very well-diversified portfolio across various sectors that is low-cost implemented. And we've also focused on small caps and value stocks. That's our philosophy in the models and the portfolios that we use for our clients. Could you just elaborate a little bit as to how that part of the market, or those sectors have done well and why?
Steve: Yeah, sure Scott. Well, first of all, an investment philosophy that focuses on those small caps, and value stocks are certainly sound, because the empirical evidence shows in the long run, you expect small caps to do better than large caps. And you expect value stocks to do better than growth stocks, although it won't happen in every period you look at. As it so happens Scott, in the last year though, here in Australia, small caps and value stocks have done really well. So the first bar you see there is what's called a small-cap premium, it's small ordinaries against the ASX 200, and there's about a 15% premium for the value stocks leading the growth stocks in the last 12 months. When I look internationally in the small-cap space, we see the same thing, a very strong, small-cap premium. The value premium you don't see there in the last 12 months in the global space. And that's really got to be with those large IT companies from the U.S. we were just talking about Scott. They tend to be large growth companies, so they're doing better than value companies.
Scott: Okay, great. No, that's excellent. Well, it seems that we've had a tremendous 12 months, and who knows what's going to happen going forward, but if we keep following the approach that we take with our portfolios, we look forward to talking through this again in the next quarter and seeing where we're at, and thanks very much, Steve, really appreciate it.
Steve: Terrific. Thank you, Scott. I look forward to catching up with you again in the next quarter and seeing how markets go then.
Scott: Oh great, thanks, Steve.
Steve: Okay. Bye-bye.