Investors betting on COVID-19 recovery within two to three years: AFIC

The chief executive of the country’s largest listed investment company says investors are expecting a recovery from COVID-19 within two to three years, which explains the disconnect between sharemarket performance and the economic reality faced by Australians.

The Australian Foundation Investment Company’s investment portfolio of local equities returned 31.9 per cent this year, compared to the 10-year average of 11 per cent. AFIC will pay shareholders a fully franked dividend of 14 cents per share, the same as last year, on August 31.

AFIC managing director Mark Freeman says stock markets are bracing for COVID-19 to be over within two or three years. Credit: Wayne Taylor

Chief executive Mark Freeman warned high investment returns would not be repeated next year because gains came off a low base following the stock market crash last March as COVID-19 began to spread around the world, triggering an investor sell-off.

However, the ASX has continued to climb to new highs, reaching a record close last Friday and investors are bracing for a “dividends bonanza” this corporate reporting season due to low interest rates and high government stimulus.

The strong market conditions are seemingly at odds with the economic reality faced by many Australians, as the Delta strain wrecks havoc around the country and Sydney remains in lockdown trying to contain the latest outbreak.

Mr Freeman said the market was “very forward-looking” and “tends to look through these dips”, adding the companies that have been hardest hit by the pandemic have been small businesses in specific industries rather than large listed companies.

“If you think about the companies being hit the worst, it’s people running small travel consultancies, restaurants, bars, anything to do with entertainment. They tend to be smaller companies not listed on the stock market,” he said. “The market is looking forward and tends to look through the valleys in terms of the economic outcome, saying what’s it going to look like in two or three years’ time? That’s what’s important.”

In addition, Mr Freeman said the record low interest rates and faster-than-expected economic recoveries, combined with the gradual rollout of COVID-19 vaccines globally had pushed stock markets higher.

“There are some concerns there might be a bit of inflation around but interest rates are next to nothing, people are still looking for places to invest money. It does tend to go into sharemarkets not just here but globally.”

AFIC’s net profit was down 2.2 per cent for the full year after many of the companies it has stakes in cut or withheld dividends amid uncertainty caused by the pandemic. AFIC was able to retain its own dividend by drawing down on a reserve, as the company did during the global financial crisis. Mr Freeman said this was an important selling point in why LICs are attractive investment options, as they can weather market volatility.

Alongside the results, AFIC disclosed it had divested from BHP spin-off South32 and trimmed back its holding of Oil Search, reducing the company’s total exposure to the oil and energy sector to about 2 per cent. Mr Freeman said AFIC did not have any investments in thermal coal and would continue to reduce its exposure to the fossil fuel sector, due to concerns over the “long-term structural outlook”.

“Woodside, Oil Search and Santos, a lot of what they do is gas. There’s going to be demand for a lot of their product for some time. But clearly . . . where we get energy from there is a fundamental shift happening globally.”

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