The latest monthly commentary, for December 2020, can be found here.
- Risk assets (e.g. equities and commodities) performed strongly in November following encouraging Covid-19 vaccine trial results from Pfizer-BioNTech, AstraZeneca, and Moderna.
- Global equities returned 13.3% in November, many markets had one of their best monthly returns in several years. Some markets reached historical highs, including New Zealand and the US. European markets outperformed, Spain and Italy returned 28.3% and 26.3% respectively.
- US Food and Drug Administration (FDA) approval of a Covid-19 vaccine could be as early as 10th December 2020. Europe is likely to approve a vaccine(s) by the end of the year.
- A great way to finish a very challenging year.
- Expectations are for widespread vaccinations in the US by April 2021, high-risk individuals will receive the vaccine earlier, as early as mid-December 2020.
- Likewise, it is anticipated large proportions of the population in the UK, European Union, Japan, and Australia will be vaccinated by May 2021. It is estimated New Zealand will get their first doses of the vaccine in March 2021.
- In addition to the widespread public health benefits, global economic activity is expected to pick up in the second quarter of 2021, underpinning the V(accine)-Shaped Recovery, as expressed by Goldman Sachs. They forecast 5% growth in the US over 2021, and 6% for the global economy.
- In the interim, global economic activity is expected to weaken over the last quarter of 2020 and into the first quarter of 2021 due to the rise in Covid-19 cases over the last couple of months in Europe and the US, and as the northern hemisphere heads into the winter months (a high risk period).
- There has been a softening of European high-frequency data recently, such as truck milage data in Germany, UK retail sales, and cinemas and restaurants have witnessed declining revenues due to the tightening of lockdown measures. Although less severe than actions undertaken in Europe, State and Local restrictions have increased in the USA.
- The outcome of the US elections buoyed markets at the beginning of the month. Although Biden has been elected the 46th President of the United States of America, congress will likely remain divided. A divided government means regulatory risks have decline, taxes are likely to remain lower, some pro-business policies will remain in place, and government spending to be less relative to the Blue wave outcome. A $1 trillion dollar US Government stimulus package is now expected, less than half of what was previously anticipated.
- Recent US earnings have also surprised on the upside, supporting markets, as US companies managed to maintain profit margins better than expected despite the large hit to revenues.
- November was characterised by a “pro-cyclical” trade, where those stocks that have lagged the market for some time and will benefit more from an opening of economies outperformed. From a sector perspective Energy, Financials, and Consumer Discretionary performed well. The “Covid” trade sectors, Consumer Staples, Healthcare, and Utilities lagged the broader market. Likewise, value and high beta stocks outperformed, low volatility, momentum, and growth underperformed – this will be reflected in relative manager performance in November.
- In other asset classes, commodities returned 8.6% in November, crude oil was up 25.7%, surpassing pre-covid-19 highs, and gold fell -5.6%.
- Fixed income performed well, particularly corporate credit and high yield, both returning over 3% in the US.
- Emerging markets equities underperformed developed markets, returning 8.9%. (above returns based on S&P Index data.)
- The US dollar continued to weaken over the month. This saw the New Zealand dollar (Kiwi) trade at a two and half year high versus the Greenback, rising from 66.25 cents to 70.41 cents (+6.3%).
- The strength in the Kiwi partly reflects a scaling back of expectations the Reserve Bank of New Zealand (RBNZ) will move the Official Cash Rate (OCR) into negative territory, given rising house prices e.g. house prices in New Zealand’s largest city, Auckland, have risen 10.8% since June averages based on sales by New Zealand’s biggest real estate business, Barfoot and Thompson.
- Key risks include ongoing uncertainty over transition of power in the US, global economic activity slows more than expected due to recent rise in covid-19 cases, US government stimulus package disappoints, and vaccine roll out is slower than anticipated.
- Albeit the medium-term outlook for equities is well supported by an eventual roll out of a vaccine and ultra-low interest rates. Low interest rates are expected to remain in place for some time, the US Federal Reserve is not expected to raise interest rates until 2025.
- Equities remain attractive relative to bonds. Although longer-term interest rates are likely to drift higher over the next few years, a significant move higher is unlikely given an absence of inflation. Therefore, higher interest rates are not expected to be a threat to global equity markets for some time.
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