Weekly Market Update – 16 Nov 2020

With confirmation of the US presidential election result and an unexpected positive update on the progress of a COVID-19 vaccine global equity markets had many reasons to bounce higher.

Global equities rallied +2.8% in AUD terms as represented by the MSCI World Index which is a global and much relied upon benchmark for international equity market performance.

US equities advanced +2.2% with the S&P 500 closing at a record high of 3,585 points driven primarily by news that Pfizer and its German partner BioNTech said their COVID-19 vaccine was proving 90 per cent effective. Whilst this undoubtedly fuelled hopes amongst investors that an end to the pandemic is near, there is still plenty to unfold.

From a vaccine perspective the results from the phase III clinical trial are promising, however, questions over whether it prevents severe disease in the elderly and other most vulnerable people remain as well as how long protection from the potential vaccine lasts.

On top of this, the Pfizer vaccine looks likely to be one of the more expensive vaccines to produce, requiring possibly two vaccinations with transport and logistics also issues given the vaccine needs to be transported and stored in -70 degrees Celsius.

So, there is plenty to play but the positive affirmation from the trial led to a risk-on mentality for investors.

Unsurprisingly Pfizer (PFE) was strongly bid in the US last week rising +6% as it now firmly establishes itself as a leader amongst its global peers to develop the world’s first antidote to the COVID-19 pandemic.

What was interesting last week was the rotation away from growth stocks to traditional value stocks.

Typically, in a risk-on market the likes of Facebook (FB), Amazon (AMZN) and Netflix (NFLX) are well sought, however all three stocks fell 5-6% last week as value stocks provided investors with what they perceived to be better risk-adjusted return profiles.

Growth stocks have outperformed value stocks for the last 17 years so if this theme continues it will bear witness to significant stock rotation amongst portfolio managers.

The week ahead in the US sees October retail sales data which will be a focus along with existing home sales whilst at a stock level retailers Walmart (WMT), Home Depot (HD) and Lowe’s (LOW) all post Q3 earnings updates to the market.

Oil

2020 has been an extremely difficult year for oil.

Currently down -35% year to date and having traded at its lows at $16/barrel, oil has and continues to be the first place investors turn to when optimistic or pessimistic for markets.

So, it is no surprise Brent oil and WTI ratcheted +8% higher throughout the week given the positive vaccine news. Also providing support was the notion that OPEC+ may delay implementing a planned loosening of output cuts agreed in a deal earlier this year.

The issue with oil has predominantly been a supply-side issue, so any possible move to curb excess supply will provide some level of support for the oil price. Another short-term factor will be the duration of lockdown restrictions in Europe which prevent movement and ultimately have a big impact on the demand and price direction for oil. From a portfolio perspective the Prime Australian Equity Growth SMA remains marginally overweight the energy sector with a 7% allocation compared to the benchmark weight of 4%.

ASX performance and economic data

Not since the first week of June has the ASX posted fortnightly gains like we have in the past two weeks.

But that was a different market and we were rebounding off some heavy selling.

The ASX200 climbed +3.5% last week which coupled with +4.5% gain the week prior means we have rallied +8% so far in November.

At a technical level the ASX200 exited ‘correction territory’ on Wednesday with the market closing less than 10% below February’s record high, a strong indication that investors are becoming more comfortable with the outlook for the Australian economy.

Further supporting this was October’s NAB Business Confidence survey which rose to its highest level since mid-2019.

Falling COVID-19 case numbers and a relaxing of lockdown restrictions in Victoria was a key driver in the improvement of business confidence with recreational, personal services and construction industries faring best.    

Whilst trading conditions and profitability led to the improvement in conditions, the employment index remains weak which suggests the labour market is lagging the recovery in activity. Forward orders improved but remains negative and capacity utilisation also improved but remains below pre-COVID levels.

This demonstrates that the economy has rebounded from its sharp decline in H1 2020 and will continue to benefit as the economy further reopens and more of country returns to COVID-normal. However, it will likely take some time for activity to fully recover, with capacity utilisation restored and the pipeline line of work replenished. In the absence of a vaccine, business confidence remains a crucial factor for how quickly businesses expand employment and capex as demand normalises. 

The Prime Australian Equity portfolio

With Q1 updates and AGM season largely reaffirming the better-than-expected FY20 results we saw in August it is no surprise we are seeing an improved outlook for equities.

Brambles (BXB) has now rallied more than +10% after its Q1 update guided towards the upper end of guidance in terms of revenue and earnings. BXB is primarily a northern hemisphere company so it does provide valuable insight into consumer staples in US and Europe. In its update BXB said it is still seeing restocking in consumer staples so the demand side there is tracking well.

One that has lagged recently despite a very strong Q1 update is Woolworths (WOW). Like-for-like sales was +11.5%, whilst liquor sales and online sales were exceptionally strong. The share price is below where it was pre-COVID, but we think the business is in a stronger position.

WOW is leading the way online with eCommerce sales increasing 100% to $961m with sales penetration in the quarter reaching 8%. There is also the potential for the spinout of its drinks business Endeavour which will likely occur in the next year prompting a capital return to shareholders.

We believe business momentum is strong despite its share price performance and believe earnings per share (EPS) and dividend per share (DPS) will be medium term beneficiaries.

In other stock news Commonwealth Bank (CBA) climbed+5% after releasing its September quarter update which revealed $1.9b of statutory net profit after tax and cash profit of $1.8b which was down -16% on the prior corresponding period.

CBA income was stable and there was core volume growth which helped to offset lower margins. As expected, the net interest margin (NIM) was even lower than the FY20 second half because of lower earnings on deposits and capital from lower interest rates.

Whilst credit quality indicators are being insulated by repayment deferrals there was a notable decline in deferred loans with 52,000 loans remaining deferred at the end of October – down 75% from the end of June.

Looking ahead

Monday 16th November – Friday 20th November 2020

  • Monday: AU RBA Governor Lowe Speech, CN Retail Sales (OCT), Unemployment Rate (OCT)
  • Tuesday: US Retail Sales (OCT)
  • Wednesday: AU Westpac Leading Index (OCT), Q3 Wage Price Index, US Building Permits (OCT), Manufacturing Production (OCT), UK Inflation Rate (OCT), Retail Price Index (OCT)  
  • Thursday: AU Unemployment Rate (OCT), US Weekly Jobless Claims (NOV)  
  • Friday: US Existing Home Sales (OCT)

Friday 13th November, 5pm values

 IndexChange%
All Ordinaries 6609+214+3.3%
S&P / ASX 2006405+215+3.5%
Property Trust Index1443+52+3.7%
Utilities Index6910-104-1.5%
Financials Index5139+256+5.2%
Materials Index14090+149+1.1%

Friday 13th November, closing values

 IndexChange%
U.S. S&P 5003585+76+2.2%
London’s FTSE6316+406+6.9%
Japan’s Nikkei25386+1061+4.4%
Hang Seng26157+444+1.7%
China’s Shanghai3310-2-0.1%

Key dividends

Monday 16th November – Friday 20th November 2020

  • Monday: Div Ex-Date – AusNet Services (AST), Macquarie Group (MQG) Div-Pay Date – BOQPE (BOQPE), Qualitas Real Estate Income Trust (QRI), NABHA (NABHA)
  • Tuesday: Div-Pay Date – Legg Mason Australian Bond Fund (BNDS)
  • Wednesday: Div Ex-Date – N/A
  • Thursday: Div Ex-Date – WAM Capital Limited (WAM)
  • Friday: Div Pay-Date – Cromwell Property Group (CMW)

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.

SPEAK WITH US TODAY

A unique and personal service approach and support for all your business advisory and personal wealth management needs

Request a consultation

A unique and personal service approach to support all your business advisory and personal wealth management needs.

Request a consultation