There was much to be positive about as ASX companies recorded record profits and paid out bumper dividends, with Hamish Tadgell highlighting that the companies sought to take advantage of conditions unique to the COVID-19 pandemic.
“A key theme of reporting season has been the strength of corporate balance sheets. Companies have been quick to return cash in the form of higher dividends and share buybacks,” he said.
“With rates at record lows and a lack of alternative investment opportunities, much of this cash will potentially find its way back into equity markets.”
According to Mr Tadgell, Australian companies were boosted by pent-up demand, closed international borders and the second half of the financial year being mostly untouched by lockdowns.
“Too much cash chasing too few goods has been the punchline of the last 12 months,” he said.
“Resurgent demand colliding with supply disruption and capacity constraints has seen a surge in prices and profits for those companies able to meet demand, and asset prices more broadly.”
Now, with vaccines becoming more universally available and road maps out of current lockdowns becoming clearer, Australia is entering unknown territory of “living with the virus”.
“This is something that we haven’t experienced, and it’s uncertain how it will impact on confidence and behaviour,” Mr Tagell said.
When commenting on what this means for investors, Mr Tadgell highlighted how the step into the unknown was said to pave the way for potentially higher levels of volatility in the coming months.
Currently, there are mixed perceptions on what the easing of lockdowns will mean for the Australian economy.
NAB’s morning call podcast host, Phil Dobbie had suggested that “life is going to go back to normal” once lockdowns end.
Meanwhile, CommSec said “there is still an expectation that it would still be a difficult couple of months ahead (after easing restrictions) and won’t be a straightforward affair once that is the case as well,” on the day of the news.
Mr Tadgell has opted to remain on the side of caution, suggesting that investors actively manage their risk for a return to lockdown conditions while looking to capitalise on opportunities as they emerge.
“For us, it means tilting the portfolio more towards those companies who will benefit from lockdown and being active around those opportunities, but also remaining disciplined around investing in quality business where there is a margin of safety,” he said.
