While the great Aussie stock rally is largely justified, top fund managers say the market may now have run ahead of earnings.

“When some of those [support measures] fall away, it’s going to be a tougher time for many of those companies that are exposed to consumer spending,” he said.
Mr Lanchester said his fund had gravitated towards companies with “strong balance sheets” that would survive the lockdown but the “pivot to pick up on the stimulus” was hard to time.
“We have all been somewhat surprised as to how aggressive that stimulus has been.”
Wavestone Capital’s principal and portfolio manager Catherine Allfrey said she underestimated “how big and effective” the monetary and fiscal policy response had been.
“Governments have come to the party. We have seen unprecedented levels of stimulus from our government and governments globally. People have been sheltered and supported and that is what stock markets are reflecting,” she said.
The unusually rapid recovery in stocks, Ms Allfrey said, also reflected the nature of the one in 100 year event.
“The stalwarts in the market say ‘dont capitalise a one in 100 year event’ and that is what investors are doing. They are looking through that.”
Consolidation coming?
Airlie Funds Management’s portfolio manager Matt Williams said the global stimulus was twice as large as the 2008 crisis and that, coupled with the fact that “Australia had fared better than most in dealing with the health crisis,” had supported the sharemarket’s surge.
“A lot of this rally is justified, but now we are at an interesting juncture,” he said.
“The earnings picture is cloudy and companies are concerned about what happens when the stimulus such as the JobKeeper rolls off later this year.”
“The market has run well ahead of the earnings and some consolidation, if not a retracement, would not be a surprise,”
Mr Lanchester said low interest rates and bond yields have contributed to herding investors in the market but said the next earnings season will provide a test.
‘Tricky period’ for income investing
“It will be interesting when we get to August and we hear from the companies,” he said.
“There will be some very sanguine news. The outlooks will be cautious and somewhat unknown investors don’t like that.”
While stocks have mounted a spectacular recovery, investors that have relied on dividends for income have been hurt.
About $16 billion of dividends that were forecast to be paid over the next 12 months have been cancelled or deferred, forcing a rethink about the reliability of equities as a source of income.
Ms Allfrey said the banks, which have been among the main source of income, may be six to 12 months away from resuming dividends.
Investors should therefore consider looking towards companies where “value is reasonable and there is dividend support,” such as mining giant BHP Billiton, in her view.
She said the grocery sector may be reliable but the yields of around 3 to 3.5 per cent were low.
Mr Williams was cautious about relying on mining companies for income over the medium term, saying such a move would be “dangerous” as commodity prices could prove volatile.
“The dividend is a massive part of the long-run return but it’s a tricky period,” he said.