Weekly Market Update – 7 Dec 2020

The ASX continued its march higher into Christmas rallying for a fifth consecutive week.

Having recorded its best month on record in November (+10%) the ASX200 was positive four out of five days last week.

Incredibly the ASX200 now trades -0.75% down for the calendar year. To think the local market has managed to trade flat given the year 2020 has proven to be is truly remarkable.

If you consider that global equity markets as represented by the MSCI International World Index in AUD terms have recorded +8% gains year to date the ASX has actually underperformed, however, given the circumstances I think most investors would largely consider this underperformance ‘acceptable.’

As a reminder equity markets do not always trade rationally – they are the sum of the infinite wisdom of all market participants who deal in them – so trying to reconcile how some equity markets such as the US equity market has climbed +15% in a year that has seen unemployment spike and economic growth plummet may be a futile exercise.

In our view the ‘why’ is more important than the ‘how’ and consumer spending which accounts for 68% of the US economy has been undoubtedly boosted by government stimulus packages which included a US$600 weekly unemployment subsidy and a one-off US$1200 cheque to households.  

With US Congress announcing last Friday that approximately US$900b of further stimulus is on track to be delivered we see this positive momentum continuing into 2021.

Miners bounce as iron ore surges

The mining sector rocketed higher last week climbing +5.3% on the back of strong gains in the spot price for iron ore.

Not since the end of May has the sector recorded a stronger weekly gain and the iron ore heavyweights in Fortescue (FMG), BHP (BHP) and Rio Tinto (RIO) all took full advantage rallying between 7-11%.

Iron ore climbed +5% after Brazilian producer Vale downgraded production forecasts. Coupled with strong steel demand coming from China which has seen port inventories run down through heavy investment in infrastructure and further optimism that 2021 will see renewed demand, the commodity spiked to trade at a 6-year high of US$136/tonne. 

Also benefitting from the iron ore price was the AUD which jumped to US74.50¢, a level not seen since July 2018.

BHP is currently the highest conviction position in the Prime Australian Growth SMA with a portfolio weight of over 9%. We think the outlook for iron ore remains strong as evidenced by last Thursday’s direct equity recommendation to purchase BHP. However, with the stock closing on Friday at $41.50 we believe investors are best placed to purchase the stock at a limit price of $37.00.

Price action swings in roundabouts and the opportunity to purchase the stock at $37.00 on a FY22 forward P/E of 12x and a free cash flow yield of 8% is compelling.

Vaccine

It seems like every week for the past month we have been closely monitoring and writing about the global progress of vaccine developments.

Well, in what largely feels like it has ‘flown under the radar’ the United Kingdom have become the first country to approve a COVID-19 vaccine that has been tested in a large clinical trial.

Perhaps the rest of the world is adopting a ‘wait and see’ approach in terms of the effectiveness of the UKs vaccine rollout, however, it feels as if this momentous occasion was somewhat ignored.

Interestingly the UK government sided and approved the Pfizer-BioNTech Vaccine and not the Oxford University-AstraZeneca vaccine so perhaps that in itself is telling.

Only last week did pharmaceutical company AstraZeneca confirm its vaccine was up to 90% effective. However, a ‘dosing’ error recently discovered some clinical trial participants were mistakenly given a half dose rather than a full dose and produced a better immune response.

Clearly this creates significant doubts over the initial efficacy of the results and ultimately serves as a reminder to us all that each pharmaceutical company is simply racing to get to the finish line first.

Regardless, the Pfizer-BioNTech vaccine approval is a big positive and the UK equity market rallied +3% last week on the back of it.

Local data

Confirmation that Australia has exited recession territory was received last week with September quarter GDP posting a +3.3% jump which offset almost half of the -7% collapse in the previous quarter.

The September quarter rebound exceeded economist expectations of a +2.5% gain. Household consumption bounced +7.9% after falling -12.1% in the June quarter which translates to an annual consumption decline of -6.5% vs -12.7% in June.

Despite the positive data, the economy has still contracted -3.8% in the 12 months to September, so whilst we are moving in the right direction, or in Treasurer Frydenberg’s words “cause for optimism and hope”, there remains plenty of ‘recovery’ left ahead of us.

Key to the strength in the September quarter was a jump in consumption (makes up approximately 60% of GDP), which was driven by a +9.8% increase in services spending as hotels, cafes and restaurants reopened. In other news building approvals for private sector houses rose +3.8% in October to a 20-year high. Strong demand for detached housing following the relaxation of COVID-19 restrictions and record low interest rates continue to provide support for the housing sector with large increases in dwelling approvals in NSW and WA driving these gains.

Final RBA meeting for 2020

The final RBA meeting for 2020 saw official cash rates left unchanged including the 0.10% target yield on 3-year Australian Government bonds, the Term Funding Facility and the government bond purchase program announced last month.

Despite vaccine progress and better than expected recent data, the RBA expect the recovery to be uneven and dependant on significant policy support. The RBAs base case is for GDP to return to pre-pandemic levels at the end of 2021 implying a 5% increase next year and a 4% rise in 2022.

The RBA continues to view addressing the high rate of unemployment as a priority. Despite strong growth in employment numbers in October the unemployment rate increased to 7% as more people re-joined the workforce. The RBA expects further increases in the medium term as this trend continues.

Given the outlook for both employment and inflation, monetary and fiscal support will be required for some time and the RBA stated it will not increase the cash rate until actual inflation is sustainably within the 2-3% band which the RBA believes is at least 3 years away.

For this to occur, wages growth will have to be materially higher than it is currently which will require significant gains in employment and a return to a tight labour market. The RBA intends to keep the size of the bond purchase program under review and stated importantly it is prepared to do more to stimulate the economy if necessary.

US Non-farm payrolls

In the words of incoming president Joe Biden, November’s jobs report was “grim.”

US nonfarm payrolls rose by 245,000 in November after rising by 610,000 in October. This was the smallest gain since the jobs recovery started in May and the fifth consecutive monthly slowdown in jobs growth. Of the 22.2 million jobs lost due to the pandemic, only 12.3 million have been recovered thus far.

Put simply only just over half of the jobs lost to the pandemic have been recovered

The Labor Department’s closely watched employment report on Friday also showed 3.9 million people have been out of work for at least six months, with many giving up, a sign of a lack of confidence in the labour market.

The slowing down in the jobs recovery appears to have been exacerbated by the onset of winter and a resurgence of the virus so the likelihood of a stimulus bill passing in the next week is high.

Biden said the stimulus bill would be the first step and committed to delivering additional relief once he takes office in January next year.

Looking ahead

Next week will be the final weekly market update for 2020. We look forward to seeing you again in 2021 and wish you all a healthy and happy festive season.

Monday 7th December – Friday 11th December 2020

  • Monday: AU ANZ Job Advertisement (NOV), CN Balance of Trade (NOV)
  • Tuesday: AU NAB Business Confidence (NOV), Building Permits (OCT), US NFIB Business Optimism Index (NOV)  
  • Wednesday: AU Westpac Consumer Confidence (DEC), CN Inflation Rate (NOV)
  • Thursday: US Inflation Rate (NOV), Weekly Jobless Claims
  • Friday: N/A

Friday 4th December, 5pm values

 IndexChange%
All Ordinaries 6865+48+0.7%
S&P / ASX 2006634+33+0.5%
Property Trust Index1468+2+0.1%
Utilities Index6833-153-2.2%
Financials Index5538-13-0.2%
Materials Index15379+769+5.3%

Friday 4th December, closing values

 IndexChange%
U.S. S&P 5003699+61+1.7%
London’s FTSE6550+182+2.9%
Japan’s Nikkei26751+106+0.4%
Hang Seng26836-59-0.2%
China’s Shanghai3445+37+1.1%

Key dividends

Monday 7th December – Friday 11th December 2020

  • Monday: Div Ex-Date – Collins Foods Limited (CKF); Div Pay-Date – Perpetual Credit Trust (PCI)
  • Tuesday: Div Ex-Date – NABPF (NABPF); Div Pay-Date – CSR Limited (CSR), Metrics Master Income Trust (MXT), Metrics; Income Opportunities Trust (MOT)
  • Wednesday: Div Ex-Date – WBCPI (WBCPI)
  • Thursday: Div Ex-Date – ANZPG (ANZPG), ANZPH (ANZPH), Select Harvests (SHV); Div Pay-Date – GrainCorp Limited (GNC), NAB (NAB)
  • Friday: Div Ex-Date – WBCPH (WBCPH)

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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