Weekly Market Update – 9 Nov 2020

Well the pollsters got it right, then got it wrong only to eventually get it right again.

The main surprise was how close the election race eventually became given the large number of opinion polls conducted prior to the election which had Biden prevailing comfortably.

In what felt like an extremely slow count, votes in languishing states such as Nevada and Pennsylvania finally went to the Democrats whilst Georgia and North Carolina are still being counted.

Mail-in votes clearly had a very big impact and ultimately swung some states with Trump leading Biden in

Pennsylvania at one stage by 15% only to lose the state once postal votes had been counted.

Ironically, Vermont Senator Bernie Sanders predicted this would all unfold exactly as it has. He predicted Trump’s initial lead would dwindle, and that Trump would question the integrity of the mail-in system which would negatively impact the Republican vote.

The 2-minute link to the Sanders video is posted here.

Of course, this is merely a formality now given Biden has accumulated more than the required 270 electoral votes to take the White House.

What is not a formality is the manner in which Trump agrees to exit the office. However, one thing appears abundantly clear. Mail-in ballots have been relied on in the US voting system dating back to the Civil War when soldiers casted their ballot in camps under the supervision of clerks, so taking this to the US Supreme Court feels largely irrelevant.

The prospect of a Republican Senate remains a positive as markets prefer a divided Government. Changes to corporate taxes and a tighter regulatory environment can be more easily blocked by the Republicans if they control the Senate which will be decided on January 5 when the state of Georgia holds run-off elections for both its seats.

Global equity markets

 It didn’t seem to matter who was winning the Presidential race at any given point in time, global equity  markets were bullish. 

US equities as represented by the S&P 500 soared +7% – the best weekly return since March 27 when it rebounded +10% from the prior week’s coronavirus-induced panic selling. 

Risk-on was certainly evident despite the election uncertainty with growth and tech stocks faring best as the NASDAQ rallied +9%. It was the usual story with all FAANG stocks surging between 8-10% higher. 

FAANG stocks are seen as reliably profitable and immune to the economic cycle with low discount rates making their future earnings streams ever more valuable. 

But it was not just the US market. 

In the UK, the benchmark rallied +6% despite increased lockdown measures to combat rising covid-19 cases. The Bank of England’s (BoE) decision to increase its QE program by another $270b taking total purchases of government bonds to more than $1.2 trillion signals an ongoing commitment to fight the economic contraction with continued fiscal and monetary support. 

Interest rates

We have spoken at length about why, in spite of this global economic contraction, we are starting to become more optimistic on the outlook for the global economy.

When central banks cut lending rates and purchase government bonds through the likes of QE, they are providing a backstop. They are encouraging spending by making it cheaper to borrow money and discouraging saving by lowering the return one earns on cash in the bank.

Of course, the reason central banks are doing this is because activity has slowed, and inflation remains idle. Whilst we remain cautious because of the slowdown in global economic activity it is hard to ignore the message from central banks around the world.

The Federal Reserve kept its loose monetary policy intact on Thursday and held interest rates steady at 0-0.25% whilst pledging to do whatever it can to sustain a US economic recovery.

The Federal Reserve doubled down on its promise to not even consider raising rates until maximum employment has been restored and inflation is heading above 2%.

Importantly when Chair Jerome Powell was asked whether monetary policy is out of power or ammunition he responded “no, we’re strongly committed to using these powerful tools to support the economy for as long as needed.”

The Bank of England likewise held interest rates at historic lows of 0.1% despite the prospect of negative rates looming. The messaging here was just as clear with the BoE Governor Andrew Bailey stating “we are obviously in a difficult period but that doesn’t mean we should hold back from using all the tools we can to support the economy and frankly people’s livelihoods.”

These central banks collectively drive markets, so it pays to listen, and this is the main reason why we are turning cautiously optimistic.

Finally, the Reserve Bank of Australia delivered a very similar message on Tuesday and cut rates by 15bps to 0.10% which had largely been pre-empted. But it was the commentary from the RBA that we are encouraging people take notice of. “Expect this level of rates for the next three years.”

The RBA also revealed details of a larger-than-expected $100b government bond-purchasing program targeting 5 and 10-year bonds over the next six months.

All we are trying to reinforce here is that it pays to listen to central banks and the messages are unashamedly similar.

ASX

The ASX200 was also well bid last week advancing +4.4% to record its best weekly gains in over one month.

Gains were recorded across all major sectors with consumer discretionary +7%, industrials +6% and IT +6% faring best.

Consumer discretionary stocks received a boost from retail sales data which showed gains of +6.5% in the three months through September after having declined by -3.5% in the prior quarter.

The quarterly rise was driven by a recovery in industries that saw sharp falls in the June quarter as well as continued strength in industries such as food retailing and household consumption as COVID-19 restrictions in much of the country were wound back.

Locally, one of the best performing stocks in our portfolio was News Corporation (NWS) which rallied +19% following the release of a Q1 update which revealed net income of $47m reversing a net loss of $211m in the prior corresponding period.

Q1 EBITDA increased +21% driven primarily by strong growth in Digital Real Estate Services, Dow Jones and book publishing segments.
Other performers included Brambles (BXB) which bounced +9% after a Q1 update raised the lower end of its fiscal 2021 revenue and earnings guidance. Strong demand for consumer staples helped BXB lift Q1 sales revenues by around +6%.

BXB now anticipates fiscal 2021 sales revenue growth of 2-4% at constant foreign exchange rates, compared with the 0%-4% range provided at August’s annual result.

Both NWS and BXB are core holdings in the newly repositioned Prime Australian Equity Growth SMA.

Meanwhile, the major banks which continue to face headwinds due to deteriorating interest rates and increased capital adequacy requirements saw Westpac (WBC) and NAB (NAB) report full year results.

Higher impairment charges and a slump in economic activity were largely to blame for WBCs fall in cash earnings which fell by -62% to $2.6b and ultimately led to a reduced 31c per share dividend payment to shareholders.

WBCs stronger capital position and deferral run-off were undoubtedly the highlights of its FY20 result whilst NABs heightened exposure to small and medium-sized businesses continues to be a concern from a credit quality perspective.

Of the four major banks we continue to favour CBA and WBC.

Looking ahead

Monday 9th November – Friday 13th November 2020

  • Monday: AU Building Permits (SEP)
  • Tuesday: AU NAB Business Confidence (OCT), CN Inflation Rate, UK Unemployment Rate (SEP), US NFIB Business Optimism Index (OCT)
  • Wednesday: AU Westpac Consumer Confidence (NOV)
  • Thursday: AU Consumer Inflation Expectations (NOV), UK GDP Growth Rate Q3, Balance of Trade (SEP), US Inflation Rate (OCT), Weekly Jobless Claims (NOV)
  • Friday: CN M2 Money Supply (OCT)

Friday 6th November, 5pm values

 IndexChange%
All Ordinaries 6395+262+4.3%
S&P / ASX 2006190+262+4.4%
Property Trust Index1391+106+8.2%
Utilities Index7014+135+2.0%
Financials Index4883+1392.9%
Materials Index13941+512+3.8%

Friday 6th November, closing values

 IndexChange%
U.S. S&P 5003509+129+7.3%
London’s FTSE5910+333+6.0%
Japan’s Nikkei24325+1348+5.9%
Hang Seng25713+1606+6.7%
China’s Shanghai3312+87+2.7%

Key dividends

Monday 9th November – Friday 13th November 2020

  • Monday: Div Ex-Date – ANZ Bank (ANZ); Div-Pay Date – Metrics Income Opportunities Trust (MOT), Metrics Master Income Trust (MXT)
  • Tuesday: Div-Pay Date – NB Global Corporate Income Trust (NBI)
  • Wednesday: Div Ex-Date – ResMed (RMD), Westpac Bank (WBC)
  • Thursday: Div Ex-Date – N/A
  • Friday: Div Pay-Date – Charter Hall Long Wale REIT (CLW)

Contact

Mark Johnson – Chairman of Investment Committee(03) 8825 4738
Guy Silbert – Investment Manager(03) 8825 4750
Jordan Lisle – Dealer & Research Assistant(03) 8825 4749

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

Mark JohnsonT: (03) 8825 4738Cameron MorcherT: (03) 8825 4737
Livio Caiolfa T: (03) 8825 4748Michelle BromleyT: (03) 8825 4751
Marcus AingerT: (02) 9134 6292Nicole LewisT: (03) 8825 4734
Dylan CresswellT: (03) 8825 4707Garry FrizzoT: (07) 4019 2410
Michael CooperT: (07) 3010 8597Nicholas MillerT: (03) 8825 4722
Jarrod RoddaT: (03) 8825 4729

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

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