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Global equity markets struggled last week as the approaching US election and increase in COVID-19 cases in the northern hemisphere weighed heavily on risk appetite and investor optimism.

Traditionally a rotation out of risk assets implies an increased rotation into fixed income products such as government and corporate bond markets. However, US Treasury markets were also weaker last week as investors sought to raise cash ahead of next week’s election.

Naturally the weakness in global equity and fixed income markets saw the volatility index (VIX) spike to a five month high, however, given the ‘second wave’ of COVID-19 occurring in Europe and the uncertainty surrounding the election we believe this spike is likely to be short lived.

The ASX200 fell -3.9% with energy stocks faring worst down -6.6% driven by steep declines in the price of crude oil (-10%). With oil supply having outstripped demand significantly in 2020 and some members of OPEC reluctant to extend production cuts the outlook for fuel consumption remains cloudy.

Outperformers this week were consumer staples which were flat. Major players Coles (COL) and Woolworths (WOW) which together account for 65% of the sector were mixed.

WOW fell -1.7% on no news but did announce some changes to senior management with a newly appointed managing director for BIG W and the outgoing managing director appointed Chief Risk Officer for the Woolworths group.

COL climbed +3.3% with Q1 sales reflecting a +10.5% increase in sales revenue compared to the prior corresponding period. COL benefitted strongly from lockdown restrictions particularly in Victoria with online sales growing by more than 100% whilst liquor store sales and convenience store sales (Coles Express) rose +17% and +10% respectively.

We believe WOW will likely report a similar growth rate when it releases its Q1 sales update to the market this Wednesday.

All eyes on the US Election

Certainly, the election this week shapes up as a key driver of market volatility and performance.

Whilst Trump appears to have made up some ground in the past week Biden is still very much expected to win the election with markets pricing him a 65% chance to win vs Trump 35%.

Still anything can happen…Hilary Clinton’s chances were as good in 2016 as Biden’s are now so we know from recent history these are merely forecasts.

Markets tend to react negatively to uncertainty so if a situation emerges where we have no immediate result, we may witness some weakness.

From a longer-term investment perspective, the key focus is not if Biden takes the White House, but what happens in the Senate. If Biden takes the White House and the Senate remains with the Republicans, then it will be difficult for the Democrats to bring about major change because the Republicans can block most of the major policies. However, if the Democrats land the trifecta (White House, Lower House and Senate) they would be in a much stronger position to pass ordinary legislation.

Republicans currently hold the Senate 53-47, so this will be worth tracking.

US data

Looking elsewhere in the US and Q3 GDP grew at a record pace as the government injected more than $US3 trillion worth of pandemic relief which fuelled consumer spending GDP jumped +7.4% last quarter after falling -9% in the April-June period.

Consumer spending, which accounts for 68% of the US economy, increased +40.7% in Q3 boosted by stimulus packages which included a $US600 weekly unemployment subsidy and a one-off $US1200 cheque to households. Service spending also increased, though it remained below its fourth quarter level.

Whilst the headline number of +33% annualised growth came in marginally ahead of forecasts (+32%) it is important to note that the US economy is still smaller than it was pre-pandemic with output down -3.5% since the beginning of the pandemic.

It is also worth mentioning that the +33% annualised growth implies another three consecutive quarters of +7.4% growth which clearly is not going to happen given the inability to reach an agreement on further stimulus and rising COVID-19 infections in the US mean more people will stay home and spend less.

At a stock level earnings season saw Apple (AAPL), Amazon (AMZN), Netflix (NFLX), Facebook (FB) and Google’s parent company Alphabet (GOOG) all report last week with AAPL (-5.4%) and FB (-7.6%) faring worst.

AAPL posted September quarter revenue of US$64.7b but saw iPhone sales decline by more than -20% whilst FB reported Q3 revenues of US$21.5b which beat expectations, but users in the US and Canada fell by around 2 million.

Interestingly streaming video service Netflix raised monthly charges in the US for its standard and premium subscription plans on Thursday which saw shares rally +4% only to reverse these gains on Friday.

A closer look at home

Australia’s headline Q3 inflation rate was +1.6% higher in September following a record -1.9% Q2 decline when childcare was made temporarily free and petrol prices contracted -20%.

The rebound in Q3 was primarily due to childcare fees returning to their pre COVID-19 rates which added 0.9% to CPI. Excluding the impact of childcare, CPI would have risen 0.7%.

Annual inflation advanced +0.7% after declining -0.3% in the year to June. Despite the uptick, underlying inflation which smooths out wild price swings and is closely monitored by the RBA from a monetary policy standpoint came in at +1.2% and remains well short of the 2-3% target band.

Markets have all but priced in a 15bp rate cut when the RBA sit this Tuesday so we would be more surprised if we didn’t get one than if we did.

Best performers in a difficult week

Not all local shares fell last week despite the market’s poorest weekly returns since late April.

Coca Cola Amatil (CCL) rose +15.6% following a takeover offer from Coca Cola European Partners valuing CCL at $9.3b. Coca-Cola Europe placed an 18.6% premium on the previous closing share price with a $12.75 cash per share offer. Provided confirmatory due diligence is completed CCL intend to recommend shareholders accept the offer.

ResMed (RMD) climbed +8% after providing a Q1 update which reported a +10% increase in revenue to US$752m with net profit rising +37% to $US184m. Strong demand for ventilators for COVID-19 patients saw sales peak 6% higher than market forecasts.

ANZ FY20 report

ANZ (ANZ) was the worst performing major bank falling -4.9% after reporting its full year 2020 result. ANZ reported an unaudited statutory profit after tax of $3.58b – a 40% decline on last year’s 5.95b statutory net profit. Cash profit from continuing operations was $3.76 billion, having fallen -42% on the prior corresponding period.

ANZ booked FY20 credit impairment charges of $2.74 billion, which increased from FY19 due to the impact of COVID-19 and a first half impairment of Asian associates of $815 million, also pandemic-related. Meanwhile its Common Equity Tier 1 Capital Ratio remained healthy at 11.3% and the board announced a fully franked dividend of 35 cents per share.

One stock to watch this week

One of the most interesting stories last week came from jobs platform Seek Limited (SEK) after the stock went into a trading halt mid morning on Thursday.

The reason being US-based short seller Blue Orca Capital headed by Soren Aandahl released a report claiming SEKs Chinese online job recruitment platform Zhaopin which accounts for 48% of group revenue was grossly overvalued, mispricing future growth and more importantly posting fake job advertisements.

Whilst the assertions are undeniably bold, Aandahl has a successful track record in Australia having successfully shorted sandalwood producer Quintis and more recently fund manager Blue Sky.

SEK shares fell -6.5% until the trading halt was announced with the halt due to be lifted once a response from management has been released to this ASX this morning.

Looking ahead

Monday 26th October – Friday 30th October

• Monday: AU Group Manufacturing Index (OCT), Building Permits (SEP) ANZ Job Advertisements (OCT), CN Caixin Manufacturing PMI (OCT)
• Tuesday: AU RBA Interest Rate Decision, US Presidential Election
• Wednesday: AU Retail Sales (SEP), CN Caixin Services PMI (OCT), US Balance of Trade (SEP)
• Thursday: AU Balance of Trade (SEP), UK BoE Interest Rate Decision, US Weekly Jobless Claims
• Friday: AU RBA Statement, US Fed Interest Rate Decision, Non Farm Payrolls (OCT)

Friday 30th October, 5pm values

Friday 30th October, closing values

Key dividends

Monday 26th October – Friday 30th October

• Monday: Div Ex-Date – Legg Mason Australian Bond Fund (BNDS); Div-Pay Date – Harvey Norman (HVN)
• Tuesday: Div Ex-Date – Jupiter Mines (JMS); Div-Pay Date – Perenti Global (PRN)
• Wednesday: Div Ex-Date – Bank of Queensland (BOQ)
• Thursday: Div Ex-Date – N/A
• Friday: Div Pay-Date – MFF Capital Investments (MFF)

Contact

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

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