‘Normal’ …are we there yet?
December Monthly CiN-sights
Keeping in line with the tradition that there’s never a dull moment in the markets, November proved to be another eventful month:
Americans voted out Republican president Donald Trump in favour of Democrat candidate Joe Biden. The Democrats won the House but were unable to capture majority in the Senate, thus providing a gridlocked stability to the existing political system. Pfizer/BioNTech and Moderna announced that their COVID-19 vaccines had achieved 95% and 94.5% infection prevention efficacies respectively (based upon interim analyses) while Oxford/AstraZeneca achieved an average efficacy of 70%. Closer to home, the RBA joined forces with global central banks in further easing monetary policy, lowering the official cash rate to 0.10% and announcing a $100 billion quantitative easing program.
Overall, the markets reacted favourably to these news. The S&P500 was up 10% to 3585 while the ASX200 rallied about 8% to 6405 in the first two weeks of November. Investors welcomed the outcome of a divided US government implying a reduced risk of corporate tax rate hike while increasing the chances of a fresh albeit smaller stimulus approval. The outcome appears especially beneficial for US healthcare and technology stocks which were most likely to suffer from Mr. Biden’s plans for higher corporate taxes and regulatory intervention.
Similarly, The RBA’s recent policy action represented a dovish stance aimed at supporting the domestic economy, balance sheets/asset prices and deflecting upward pressure on the local currency. With cash held in bank accounts now paying almost zero interest, riskier assets such as equities, hybrids, bonds, and property stand to benefit from increased investment inflows as investors chase higher yields.
The major theme of the month was the likelihood of a successful vaccine which has improved investor visibility of a near-term return to normality. Promising vaccine results breathed life into Covid-19 distressed securities and triggered a reflation rally in small caps, value and cyclicals. Energy, industrials and financials were the top performers in the ASX200 over the first two weeks of November, due to expectations of renewed demand, while healthcare and tech sectors which have outperformed the broader market during the pandemic suffered declines. Emerging markets, an asset class most expected to outperform in FY21, was also a beneficiary of this rotation exposure. The MSCI EM index was up 3% during the two weeks to mid- November and is up 5% for the month.
Positive investor sentiment however, continues to be countered by a resurgence in virus infections and mounting restrictions in the US and Europe. The US has now reported more than one million new cases of Covid-19 in a week, with nearly 90,000 people hospitalized – more than there have been at any time since the pandemic began. Cases have also been rising in Europe with the UK, France, Russia, Italy and Spain among the countries with the greatest number of cases. Healthcare and technology stocks that were sold down at the start of the month have also picked up momentum to end in a positive territory.
In spite of the heightened risks at the start of the quarter we remained Neutral on AU and US equities choosing to hold long- term risk positions and deploying cash optimally (as indicated in our quarterly market views Q4 2020). The move has been rewarded over the month due to a strong resurgence in several equity market sectors; overall the S&P500 was up 11% to 3621 and ASX200 climbed 10% to 6518 for the month of November.
Recent market rally reflects a strong bullish momentum; however, we envisage divergent investor sentiment and rotation from growth to value, large cap to small cap and US to emerging markets to continue in the near term. As such, and notwithstanding the very welcome news by vaccine developers we remain cautiously optimistic on the view that while there is light at the end of the tunnel, we may still have some way to go before we get there.
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