Banks lead market rebound amid economic expansion

In a six-day winning streak, the S&P/ASX 200 rose 5.9 per cent as banks led the rebound in Australian shares. Picture: NCA NewsWire/Joel Carrett

Australia’s sharemarket has continued to surge, with banks doing much of the heavy lifting.

Together with a $3.8bn private equity takeover bid for Link Administration, stronger gold stocks and an ongoing resurgence in the technology sector, a 1.6 per cent rise in the banks index pushed the S&P/ASX 200 up 0.5 per cent to a seven-week high of 6132 to start the week.

In a six-day winning streak the S&P/ASX 200 has now risen 5.9 per cent thanks to Australia’s world-leading fiscal stimulus and renewed strength in the US sharemarket. The Wall Street rise comes as betting odds and opinion polls suggest Joe Biden will win the US presidential race by a considerable margin (barring the kind of surprise seen in 2016), ­potentially handing the Democrats a clean sweep victory that ­allows major fiscal stimulus.

Banks continue to drive a big part of the rebound in Australian shares, with the S&P/ASX 200 Banks Index up 9.2 per cent in the past six days. It fits with the idea that the budget has lessened the economic risk for banks and that a global economic recovery now favours cyclical and value stocks.

With the September dip fast evaporating for local and global sharemarkets, JPMorgan’s global markets strategy team, led by ­Nikolaos Panigirtzoglou, increased their recommended equity market allocation to 8 per cent, from 6 per cent on Friday.

With the headwinds from two of the three main factors behind that correction — a disappointing September FOMC meeting and previously frothy positioning by momentum traders in US equities, especially in the Nasdaq — now believed to have run their course, the strategists are comfortable recommending clients take advantage of last month’s correction to add equity risk.

“Of course, we recognise that US election uncertainty remains as a headwind for risky markets over the coming weeks,” Panigirtzoglou says. “At the same time, the widening in the polls suggests the probability of a close or contested US election result is reduced relative to a couple of weeks ago.”

Even if the US election result proves to be too close or contested, resulting in a new bout of uncertainty next month, he doesn’t see it derailing a positive medium to longer-term outlook for risky assets, underpinned by still low overall equity positioning, easy conditions in credit and funding markets with central bank support, a structural change in the liquidity and rate environment and expected economic recovery driven by lockdown relaxation in 2021 on positive vaccine news.

Even before a potentially major addition of US fiscal stimulus before or after the US election, Macquarie’s Australian equity strategist, Matthew Brooks, notes that the OECD Leading Indicator now shows that the US and eurozone economic cycle shifted to “expansion” last month.

“Stocks tend to rise in ‘expansions’, with cyclicals and value outperforming,” Brooks says.

“This expansion is supported by stimulus, and we still expect to see more stimulus in the US, at the latest after the presidential election.”

The US and the eurozone are following the lead of China, where growth is accelerating.

Australian shares tend to rise in such expansions, with cyclicals and value outperforming and, given the V-shaped recovery, returns from the local market are lower than they should be at this point. “While the absolute level is high, the year-on-year rise in the S&P/ASX 200 price-to-earnings ratio no longer looks excessive relative to the improvement in the cycle,” Brooks says.

Australian value stocks outperformed in the first expansion year after the last four US recessions and, while there’s more technological disruption than ever, Brooks still expects a ­rotation to non-structurally challenged value companies, the biggest of which will be the banks.

Value stocks in his model include energy stocks such as Oil Search, Worley and Ampol, real estate stocks such as GPT and Lendlease, and banks including ANZ, Westpac, plus Seven Group.

But Brooks still thinks commodities are in a “mini-upcycle”, supported by a global wave of commodity-intensive spending on infrastructure and construction. “China was the first to stimulate, and Australia flagged their contribution in the federal budget, but we still expect more US stimulus, at the latest after the election, noting both Biden and [Donald] Trump could invest over $US1 trillion ($1.4 trillion) in infrastructure over 10 years.”

For exposure to that mini-upcycle in commodities, his model portfolio is overweight BHP, Fortescue Metals, Rio Tinto, Worley, Oil Search and Seven Group.