Allan Gray has signalled that it is progressing on the basis that yields will be close to zero in the near future for the majority of ASX-listed companies.
Research released by Allan Gray found March 2020’s intraday stock market volatility was greater than at any other time in the last 20 years and significantly exceeded the peaks during the global financial crisis.
The findings showed the recent volatility far exceeded other extreme world events including the September 2001 terrorist attacks, the collapse of Lehman Brothers during the GFC, Black Monday on 8 August 2011, Chinese flash market crashes in August 2015 and news on Donald Trump’s election victory in November 2015.
Allan Gray chief investment officer Simon Mawhinney said there are some ASX companies whose earnings have not been badly impacted by COVID-19, that will be in a position to maintain or even enhance dividends. He pointed to Woolworths, Coles and other staples.
“But many other companies have experienced big losses and won’t be able to pay a dividend without some sort of capital impost, or elevating their gearing,” Mr Mawhinney said.
“In April we had APRA writing to the banks and insurers requesting a prudent reduction in dividends and materially reduced level of returns to shareholders over the coming months.”
On Monday, Challenger alerted shareholders it would not be paying a final dividend.
A number of the banks have also shelved or downsized their dividends, after Bank of Queensland was the first to defer its payout in April.
Mr Mawhinney had called out the widest gap he had seen between defensive stocks, such as healthcare and utilities, versus cyclical stocks such as materials, energy and banks a few months ago, but he commented the divide cannot last.
“This divergence can’t continue indefinitely and it is important not to forget what might be priced into cyclical company share prices,” Mr Mawhinney said.
“Everything has a price and a momentum shift into [cyclically depressed] stocks seems [well overdue].
“Globally, we have seen tentative signs of this shift into [cyclically depressed] stocks beginning. This is not yet true in Australia, with many [cyclically exposed] sectors lagging the price performance of their overseas counterparts.”
Investors with a focus on the fundamentals and the long-term will benefit from mispricing opportunities in the market, he said.
“These opportunities are in those companies that typically have strong balance sheets and excellent asset bases, but which can be bought at extremely depressed prices given earnings headwinds,” Mr Mawhinney said.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].
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