Hedge Clippings | Friday, 09 October 2020

As much as Hedge Clippings would like to avoid the "C" word, there's no escaping it. Covid is so much a part of all our lives, such that the news is dominated by infection, testing, and mortality statistics both at home and abroad. And looking back at recent editions of Hedge Clippings, we have been as guilty of being Covid focussed as anyone else.

Realistically, as much as we'd love to move on, Covid isn't just about the present as this week's delayed budget shows. Even allowing for some political spin, the Goverment's Budget 2020-21 summary included the following headline:

"The once-in-a-century COVID-19 pandemic has fundamentally reshaped Australia's economic and fiscal outlook."

Without the spin, the word "outlook" would, or should, have been replaced by "future". From a forecast surplus of $6.1 billion (0.3% of GDP) in 2020-21, the figure is now a deficit of $213.7 billion, or 11.0% of GDP. Somewhat optimistically this is expected to improve to 3% in 2023-24, and then decline further to 1.6% by the end of the medium term. Hedge Clippings is not exactly sure of the definition of "medium term", except it's likely to be well beyond 2024. Although we guess, like age, it's relative. A bit like a medium bodied wine, but maybe we're getting ahead of ourselves, even though it is Friday afternoon.

To be fair, there's a valid get-out included: "Until a vaccine is developed and widely deployed, significant uncertainty remains".

Equally, we did opine last week that the government shouldn't hold back, urging the Treasurer to spend more, not less, but just not to waste it. What he did waste was the opportunity to ensure more of the nation's superannuation was funnelled into infrastructure spending, and as a result employment and the future. Maybe next year...

And given the global effects of Covid, the financial and health risks here are minuscule compared with those elsewhere. With the US election less than 4 weeks away on the first Tuesday in November (coincidentally also Melbourne Cup day), the polls are increasingly looking like a Biden victory, which if correct is going to significantly impact the future.

As of 6 October, according to the Guardian's poll tracker, Biden is leading 50.4% to Trump's 41.3%. Polls, however, can be misleading (just ask Bill Shorten) and the US system is not simply a case of who gains the most votes on the day (just ask Hillary Clinton). The outcome will undoubtedly affect markets, but the view that Biden is far-left seems to be incorrect based on The Economist's latest edition, which describes a Biden win as "only a little lurch leftwards" based on his spending proposals of around 3% of GDP (presumably excluding any Covid stimulus), compared with Bernie Sanders' 23%.

However, that's still considerable, with a forecast total new spending of US$7.27 trillion between 2021 and 2030, about half of which might be covered by tax rises, and the balance by public debt which is forecast to double - from the current 100% of GDP to a mouthwatering (for some) 200% by 2050.

Over $3.5 trillion in increased taxes will certainly scare a few (and possibly Trump amongst them if he ever gets to pay tax), but in reality only a few. Again from the Economist, the greatest change in after-tax income (-18%) as a result of Biden's tax plan will only affect the top 0.1% of income earners, followed by a fall of less than 10% for those in the top 99 - 99.9%. Even those in the 95-99% of income earners will only be worse off by around 2%, so they still should be able to scrape by.

The Economist describes Biden as "The Pragmatist". Assuming he wins - not a sure-fire outcome, and even if he does, there's no guarantee the current President will vacate the White House - it will certainly make for a change to the evening news.

Finally, before signing off we remember that today would have been John Lennon's 80th birthday had he not been shot in New York aged just 40.

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Hedge Clippings | Friday, 02 October 2020

Whilst at this stage it's too early to have firm details on fund performances for September, neither the ASX nor the S&P500 (or almost all other global indices) fared too well for the month, so we'd expect the usual wide range once we have the bulk of the numbers by this time next week.

Active equity managers will be under pressure to perform to justify their fee structure. They have certainly done that (and more in many cases) in the 12 months to the end of August, based on AFM's Index Report which revealed that against a fall of -5.08% for the ASX200 Accumulation Index, All Equity funds rose 5.36%, whilst on a geographic mandate basis funds investing in Australian/NZ equities rose 3.25%.

Not surprisingly, given the US market's better performance over 12 months, funds investing both in Australia and Globally fared better at +5.44%, whilst those investing specifically in the US have returned 9.08% - although this latter group are well below the S&P's 12 month performance.

Irrespective of the above facts and 10% average out performance over 12 months, the fee debate will no doubt continue: Is it worth paying higher fees for above market performance? One would have thought so, provided the outperformance came with lower risk, and consistency over time.

Turning to economic matters, next Tuesday will see the Treasurer Josh Frydenberg deliver a belated budget, with expectations of a deficit around $200bn, give or take a few billion. No doubt there'll be those (particularly amongst the opposition) who will try to make mileage out of that number when earlier this year expectations were for a small surplus.

From our perspective, the government has to do whatever it takes to manage the economy out of the COVID inspired train crash that has occurred. Provided sufficient quantities of the billions of deficit dollars are directed towards supporting those sectors of the economy or community that are in need of support, whilst stimulating those that will have the maximum effect on employment and economic activity, that would seem to be their obvious responsibility.

Will everyone and every sector be happy? Undoubtedly not, and we'll hear plenty from those that aren't, and very little from those that are. Will it put a burden on future generations? Of course, but not nearly as large a burden (or trauma) that would be caused by not creating the debt to fund the stimulus the country requires. If anything, we'd urge the Treasurer to spend more, not less.

Just don't waste it.

Australia has always been known as the "lucky country". Casting an eye around the world right now it may be easy to complain, but where else would you want to be?  While there are stories of the thousands of Australian citizens desperate to return home but unable to do so due to a lack of quarantine hotels or facilities to handle them, we don't hear of too many US, UK or EU citizens desperate to leave our shores for their homelands where chaos reigns supreme.

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