The ongoing global COVID-19 situation remains fluid with some European countries locking back down due to the second and third waves whereas Australia and other countries are emerging from lockdowns. Many governments remain hopeful of a vaccine solution by late 2020 or early into 2021 to help allow a pathway back to normality.

Economic shocks like we are currently experiencing typically result in social and economic adjustments. Ultimately the impact on long-term earnings estimates and valuations will be a function of the depth, duration and damage inflicted during this period of enforced subdued activity.

Some of the more obvious potential transformations include the following:

  1. Employees working from home for all or part of the week
  2. Possible reduction in required office space, given the work from home theme
  3. Reduction in the use of public transport and increase in car travel
  4. Potential decline in business travel as virtual meetings increase on the back of improving technology
  5. An accelerated shift in market share of e-commerce and omni-channel retail
  6. Low interest rates and government stimulus that have been surprisingly positive for housing with early signs of increased interest in moving away from the inner CBD suburbs


It is still too early to be confident that these adjustments will be longstanding or perhaps a short-term minor adjustment.

The 2020/21 Federal budget delivered out of season in October was, as expected, one of the most stimulatory budgets we’ve ever seen. Echoing the RBA’s explicit statement that reducing unemployment is a “national priority”, the budget outlined a commitment to provide continuing extraordinary fiscal support until Australia’s unemployment rate is below 6%. A broad strategy of spending to drive economic growth and job creation across many sectors via tax cuts, wage subsidies, infrastructure spending and investment incentives together with a boost to housing and a reboot to manufacturing. The spending was widespread across defence, health, technology, university research, the energy sector and in regional areas. The stimulus and low interest rates have helped the economy recover through the mandated COVID-19 shutdowns and early indications from the banks are that both consumers and small businesses are doing better than expected and thus the credit cycle expected sometime in 2021 may be less severe.

It now appears that Joe Biden will be the new US President albeit there is still a number of court cases being fought around the legitimacy of voting and mandatory recounts in some of the battleground states. The Democrats look unlikely to have won control of the Senate and have lost seats in the House of Representatives which means that the proposed huge stimulus, wind back of tax cuts and other “progressive” policies will be more difficult to get passed in the probable lame-duck Congress.

The very low interest rates that are now baked in for several years are leading to a typical M&A cycle as corporates look to buy growth and private equity firms start to deploy their large cash reserves. We expect to be a beneficiary of this cycle as our portfolios hold a number of stocks that are deeply discounted from their intrinsic value.

The combination of extreme positioning and valuation differentials that are still evident in the market always provides strong forces when the market reverses. Recessions are typically the catalyst for style leadership to change and our expectation is for history to repeat with value outperforming – particularly when the world becomes less sensitive to the COVID-19 situation via a vaccination or therapeutic solution. Like other large market corrections, it is always difficult to pick the bottom and thus rotating slowly into some of the beaten down value names funded by reducing and exiting the outperformers is an approach that we have found has worked well in these types of markets.