Economic Review

18 Dec

Economic Review

Global Equity Markets 
Global shares made robust gains in November. Promising news on three vaccine candidates from Pfizer & BioNtech, Moderna and Oxford University & Astra Zeneca proved to be the key positive drivers for global shares. These hopeful vaccine signals outweighed concerns on the acceleration in new virus infection cases across Europe and the United States. Political risk also moderated with the US Presidential election challenger Joe Biden claiming a clear victory despite the protestations of the incumbent Donald Trump.

US shares made record highs as investors looked beyond the immediate health concerns to the prospect of a vaccine being made available. Investors also gained comfort that the Presidential and Congressional campaigns were finally over with limited prospects of legal challenges to the results. Investors were also buoyed by the expectation that incoming President Joe Biden (Democrat) would struggle to get his planned 7% corporate tax rise through the Republican controlled US Senate. However, the US Senate is still to be decided with the final two seats in Georgia requiring another vote on 5 January 20. US economic data releases also provided encouragement. US business surveys and employment gains were consistent with a recovery continuing despite the virus spread.

Promising signs in US business surveys and employment gains were initially welcomed by investors. The US economy recorded a strong economic recovery in the September quarter with GDP expanding by 7.4%. This comes after the sharpest GDP decline of -9% in the June quarter since records began in 1947. However this recovery optimism faded over the course of October with rising virus infection cases and political concerns. The Republican and Democrat parties failed to agree on new budget measures. November’s Presidential and Congressional elections cast a shadow with markets worrying over the possibility of contested results with legal challenges deciding the outcome.

European shares also provided a remarkable rally. Despite surging virus cases and activity restrictions being implemented across the European continent in November, markets focused on news of Covid vaccines. But European PMI service surveys provided a warning sign suggesting recession conditions prevail after a brief economic recovery in the September quarter. Britain also joined the restrictions on business and personal activity with a national lockdown until the end of November.

Asian share markets also made strong gains. China reported encouraging strength in industrial production and retail sales data for October. Japanese shares surged higher in line with global share markets and a 5% GDP rebound in the September quarter.

Table 1: Global share market performance – November 2020
US S&P 500 10.9%
US Dow Jones 12.1%
Euro Stoxx 50 18.1%
German DAX 15.0%
UK FTSE 100 12.7%
Japan Nikkei 225 15.1%
China Shanghai Composite 5.2%
Source: Factset, IRESS, November 2020

Australian share market review
Australian shares recorded their strongest monthly gain in three decades. Apart from the positive vaccine news and Melbourne ending its lockdown, further monetary support from the Reserve Bank (RBA) is a tailwind to Australian shares. The RBA cut the cash interest rate target to a historic 60 year low of 0.1% in November and provided forward guidance that this cash interest rate is “expected” to remain steady for the next three years, signalling a ‘lower for longer’ stance.

Australia’s energy sector led the charge higher as global oil prices rebounded on expectations of greater travel and economic activity. Financial sector shares were also buoyant on hopes that an economic recovery would reduce loan payment deferrals and possible losses. Real estate investment trusts (REITS) also recovered on expectations that consumers and employees will soon return to shopping centres and their business offices.

The Australian Dollar (AUD) strengthened against the US Dollar (USD), rising by 4.6% during November, to finish the month at USD0.7350.

Table 2: Australian share market performance – November 2020
S&P/ASX 200 Accumulation Index 10.2%
S&P/ASX 200 Industrials Total Return Index 10.2%
S&P/ASX 200 Resources Total Return Index  10.4%
S&P/ASX Small Ordinaries Total Return Index 10.3%
S&P/ASX 200 A-REIT Total Return Index 13.2%
Source: Factset, IRESS, November 2020

Large Caps (S&P/ASX100)
Positive signs of an effective Covid vaccine buoyed travel related stocks including the oil sector. Flight Centre shares bounced by 52%, with Beach Energy shares up by 49.2% and Oil Search by 41.6%. The gold sector was weak with Saracen Minerals and Northern Star shares falling by 16.5% and 15.0% respectively. Domino’s Pizza shares fell by 12.6%.

Listed property
The S&P/ASX 200 AREIT Total Return Index posted a 13.2% increase in November, outperforming the S&P/ASX 200 Total Return Index by 3.0%. As lockdowns eased, retail AREITs performed strongly (+26.1%), followed by Diversified AREITs (+16.3%). Announcements of returns to work boosted Office AREITs (+11.1%), while the Industrial sector took a breather after a strong run (+1.5%).

Written 3 December 2020.

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