The Delta Variant is impacting parts of the Share Market, not just our Health

Bloomberg columnist, John Authers, has noted that the Covid pandemic is beginning to have a clear-cut influence on share prices again as the very transmissible Delta variant impacts globally. Fortunately, the health consequences are much less than experienced in 2020 but, even if most countries aren’t going into lockdown like much of Australia, consumer confidence and economic activity are being hurt. Some parts of the share market, like travel-related companies, are being adversely impacted. It’s a different story for iron ore miners and healthcare stocks, of course, and Aussie banks continue to do well.

Back in the early days of the pandemic, Authers regularly ran the “Covid Fear” index, which looked at the relative prices of stocks from the hotels, resorts and cruise lines sector, and food retailing. These industries have the greatest difficulties because of the pandemic.

US airlines are now at their weakest compared to pandemic-proof stocks since “Vaccine Monday” last November 2020, when Pfizer Inc. announced its successful trial results. Hotels, resorts, and cruise lines are doing a little better, but are also in a slump that has lasted since March.

“Airlines have only done marginally better outside the U.S., while the hotels sector has been far superior, remarkably regaining all its lost ground. This may have something to do with cruise lines, which are particularly strong in the U.S. and have arguably been more damaged than any other industry by the pandemic. So the resurgence of Covid fear is greater in the U.S., but the more important point is that the trend is the same beyond American shores”.

The share market is forward-looking so I don’t expect that the delta variant will cause the market to fall significantly. As Authers notes, “It still isn’t clear that the delta variant, for all its infectiousness, can do anything like the damage that the first waves wrought on the global economy, before there were vaccines and when the medical profession hadn’t yet developed techniques to keep patients alive”.

Unfortunately, here in Australia some small businesses, like restaurants and gyms, and the arts industry are suffering badly and desperately need vaccination rates to rise so that State Governments can relax the various restrictions. Personally, I’m looking forward to getting a haircut!

High Commodity Prices are helping Australia greatly

While China’s displeasure with Australia has resulted in bans and high tariffs on some of our exports like wine, China’s insatiable demand for our iron ore in the absence of alternative suppliers has led to record shipments and prices. This can be seen in the enormous profits being reported by BHP, Rio, and Fortescue. Despite a recent price fall of 30% from the May peak, at US$160 per metric ton our miners are still raking it in. This is unlikely to continue forever as Brazil and other countries will likely be able to increase their exports in coming years, though the good times look set to continue for some time. The impact of high prices for iron ore and some other commodities can be seen in the RBA commodity index.

 

 

 

 

 

 

 

 

 

 

 

How Investment Diversification helps you

Unless you are as skilful an investor as Warren Buffett, and you aren’t, having a Super or Investment portfolio largely concentrated in one area (asset class, like Australian mining shares) or one favourite share, leads to greater volatility and often poorer investment performance. Likewise, trying to time the market by chasing winners generally doesn’t work.

Vanguard commented that “In early 2020, over just a few weeks, global share markets tumbled more than 35 per cent. Sparked by investor panic over the rapid spread of the COVID-19 virus, it was one of the biggest-ever market downturns. Yet, by the end of last year, markets had recovered most of their lost ground. What’s more, they were once again trading near record highs”.

“It’s only when you take a long-term view of the performance of share markets over time that you get to see the bigger investment picture.

“While share markets do experience volatility and can sometimes fall quite sharply over short periods, they consistently rise over longer time frames. Investors who stay the course, rather than trying to time when to buy and sell, tend to be more successful in the long run.

“If you invest in products such as managed funds and exchange-traded funds that provide broad exposures to markets, you essentially capture the rising returns from those markets over time.

The 2021 Vanguard Index Chart shows the performance of six different asset types over the 30 years since 30 June 1991. These assets are Australian shares, United States shares, international shares, Australian bonds, listed property, and cash. The lowest long-term return over three decades has been from cash. Cash returns, which closely reflect official interest rates, are largely unaffected by what happens on share markets but over the long term have not served investors well.

During times of uncertainty, shares are much more volatile than more defensive fixed-income assets such as bonds. Interestingly, the best-performing assets in some years can be the worst-performing in others. That’s one reason not to chase recent winners as an investment strategy, even if it can work in the short term.

 

 

 

 

 

 

 

 

 

CBA Buy-Back

Commonwealth Bank (ASX: CBA) has announced an off-market buy-back of it shares totaling $6 billion. Off-market buybacks are a tax-effective mechanism for returning franking credits to those shareholders who most value them – typically tax-exempt shareholders such as those with pension phase superannuation and individuals below the income tax threshold of roughly $20,000.

The buyback will have a $21.66 capital component, with the balance being a fully franked dividend. The buy-back will be based on a tender, with investors tendering to sell shares at a discount of between 10% to 14% below market price.

Plato Investments has analysed this offer and, using $106.56 as a guide (the actual price used for the buyback will be the volume-weighted average price of Commonwealth Bank shares in the five trading days up to and including October 1, 2021) the maximum 14% discount would equate to a $91.64 buy-back price. With the capital component being $21.66, the other $69.98 would represent a fully franked dividend, which would have a $29.99 franking credit attached.

For a tax-exempt Australian investor, Plato estimates the buy-back at a 14% discount would be worth approximately $121.63 (disregarding the time value of money), representing about $15 or 14% more than Commonwealth Bank shares trading at $106.

The buyback is expected to be of marginal value for 15% tax rate Australian investors and not attractive to taxpayers subject to a tax rate above 15%.

For more detail on Plato’s analysis, click on this link

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

 

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