Why investing will never be the same

This was meant to be a dreadful earnings season but it turned out to be something more than that.

In every market segment it is the same story: the winners being the stocks that saw the structural shift that was coming.

This was meant to be a dreadful earnings season and it was indeed miserable for many companies. But it turned out to be something more than that: a fork in the road with a new era of winners and losers forged in the COVID crisis.

Winning in a big way are the online champions such as consumer finance stock Afterpay or online retailer Kogan. However, they have not taken the prize exclusively; they are flanked by incumbents that have read the winds of change and captured the uplift, such as retailer JB Hi-Fi.

In contrast, the companies that were once the backbone of any share portfolio — the big banks, the property trusts and the big-name department stores — are caught in midstream and being punished severely.

Off to one side are the big miners — BHP, Rio Tinto and For­tescue — where no amount of strategic miscalculations can offset a remarkable upswing in the iron ore price, which is now more than double the price the government had allowed for in the federal budget.

It is the year when the markets turned inside out, as a loss-making “buy now, pay later” player (Afterpay) enjoys a share price run that makes it five times bigger in terms of market capitalisation than stricken “insurance giant” AMP.

It’s where national airline Qantas was heading for a $1bn profit and reported a loss of $2bn instead. It’s the time that food delivery service Marley Spoon floated on the market and flopped with a share price at 35c in February … six months later it was $3.52, a “ten-bagger” for any investor who took the plunge.

Across the wider market, as the average dividend yield moved from more than 4 per cent to 3 per cent, the banks cut dividends or failed to pay any at all. Meanwhile, the combined dividend payments from the big miners now represent a third of all dividends paid on the ASX.

Rushing to rationalise these changes, wealth advisers and brokers have to change their narrative, where the hunt for income in “safe” blue chips gets switched for something considerably more fluid: the task of finding “total returns” where share price improvement must compensate for the lack of dividend income.

No wonder seasoned investors are bewildered and the legion of new investors who came into the market after the March crash are being warned daily by market regulators they cannot expect their good fortune to last much longer.

As the CEO at fund manager Platinum, Andrew Clifford, said this week, the global markets are experiencing “investment mania”, which could end in months or weeks.

No doubt this market will have a major sell-off in due time. It is overdue, and we are approaching what is the most dangerous time of the year — the US autumn, when crashes from 1987 back to 1929 occurred.

But the irrational exuberance of day-to-day markets is not going to reverse the changes set in place and expressly detailed in this year’s earnings season. As James Stewart, the national co-leader of restructuring at KPMG, puts it (in talking about the future of retailing): “What we are seeing is an acceleration of existing trends and existing conflicts brought on by the crisis.”

The same could be said for virtually every sector of the market — it’s the quickening of megatrends.

The earnings season shake up

Now in late August, five months after the March crash, we can look back with the benefit of hindsight and see it was obvious that Afterpay, Kogan or Marley Spoon would thrive in a lockdown. We might have reasonably expected the supermarket giants, Woolworths and Coles, to become even more effective as market stalwarts.

But we did not know until now which companies in the mainstream could adapt and which would be left behind. In every sector there is a proxy for JB Hi-Fi, where consistently better results mean the company can thrive, and Myer, where endless disappointments means the issue is whether the company can survive.

Nor could anyone see the problems emerging at the major banks. Yes, there has been a deterioration of trading conditions. But nobody saw 800,000 loan deferrals coming down the line within the banking system.

As fintechs, such as Tyro, cherrypick the best banking business, all that management at big banks can do is navigate this crisis to the best of their ability. And on that score again we have winners and losers, with Commonwealth Bank opening up a serious lead with its three other rivals: ANZ, NAB and Westpac.

In every market segment it is the same story: the winners being the stocks that saw the structural shift that was coming.

Consider commercial property, which is facing challenges that have not been seen for generations. Will we return to work in an office tower? Will we be happy to wander shopping centres at the weekend?

Again, winners and losers emerge quickly. The shopping centre majors are now in an epic battle with leading retail chains that will not pay rents. The Scentre (Westfield) group, which reported a $3.5bn loss this week, has locked out the Noni B group, which also reported losses midweek.

Meanwhile the Goodman Group, which also specialises in commercial property, scored big time by focusing early and hard on fulfilling the needs of the online retailing giants such as Amazon. As Scentre rolled off big losses, Goodman managed to report a 12.5 per cent lift in profit, beating analyst expectations for the ninth year in a row.

For every investor there is one upside to this season of rapid change: the story is far from over, we are nowhere near the end of this seismic shift in how we live, work, shop and invest.

Many companies are set to spring back when “normal” commerce resumes. Transurban, a top company with toll-road assets where there is no traffic, will rebound, Sydney Airport is a world-class facility where few flights are currently permitted and will spring back, too. In fact, the market is already signalling strong support for such companies.

Moving up the risk spectrum are the travel stocks, Flight Centre and Webjet. There are always opportunities and at least we know a lot more now than we did when the crisis hit in March.