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Weekly market update - 3rd of November 2020

Written and accurate as at: Nov 03, 2020 Current Stats & Facts

Last week was eventful. The surge in new Covid cases led to the start of lockdowns in Europe. In the US we also saw speculation that the election may be tighter than people expected a few weeks ago, while results season has been a touch disappointing. Meanwhile, Pfizer announced that the interim results of its vaccine trial would be delayed and did not provide interim results of the ongoing test. Domestically, the Queensland government announced its intention to maintain restrictions on travellers from Sydney. Local shares fell 3.87% (ASX200) and US equities off 5.62% (S&P 500).



The next few weeks will be critical in terms of overall market performance and whether we see a rotation to value within equities.

The key issues:

  1. Will rising Covid cases stress healthcare systems in Europe and the US?
  2. The degree to which containment measures drag on these economies
  3. The outcome – and timing – of the US election results
  4. The timing of relaxed interstate restrictions in Australia
  5. Any meaningful initiatives from the Chinese 5th plenum

Covid outlook

There was an evident deterioration in new case trends last week, driven by a surge in Europe which is now running at the double the recent daily caseload of the US. Governments have imposed lockdowns. The most draconian measures are in France and the UK. Without new measurements modelling in the UK and France signalled that the number of deaths set to exceed previous peaks. The rationale seems to be that sharp lockdown now – before pressure builds in hospitals and colder weather arrives – may mean the easing of restrictions before Christmas. One key difference this time around is that schools will remain open.

The hospitalisation rate remains manageable in the US, however, is a critical issue to watch in Europe, with the swift rise in cases and the onset of colder weather two key risk factors. Hospitalisation rates in France are showing some signs of a plateau, although it is too early to call. The onus is whether new therapies and treatments, improved protocols and better protection of vulnerable people lead to a more manageable health outcome. An absence of community support for lockdowns is evident with substantial backlashes in the UK and Italy. There is a glimmer of hope. Case numbers appear to be falling in some of the worst-affected countries such as the Czech Republic and Switzerland, albeit from very high levels. But the outlook for Europe concerns, given the rapid spread of the virus. 

US Election outlook

The election result remains a crucial factor in near-term market performance, as well as the potential to trigger a rotation to value within equities. There is a strong view that a Democrat clean sweep would see outperformance from the value names, given the scale of the fiscal package that would result. Some estimate a Democratic administration could add a further US$1.5 trillion in stimulus than the Republicans.

There are three issues to focus on;

1.The Result

At this point, national polls place Biden’s lead at 8.0%, versus a 2.9% lead for Clinton in 2016.  Most polling experts put the probability of a Biden win at mid-80%. One exception is Plural Vote which has shifted from mid-70% to 62%. It is worth remembering that pollsters adjusted their methods after 2016. There is little evidence of a robust late movement to Trump. But there are wildcards which mean the Result is not a foregone conclusion.

The scale of turnout may be a factor. Voters at the poll were 55.5% in 2016. The last time 60% turned out was in 1968, and there has not been a 65% turnout since 1908. There are potentially 20 million additional votes to be cast over 2016. There are some signs that Republican pre-voting is higher than expected. There are also signs of movement in expectations in crucial swing states. For example, Trump is closing the gap in Florida and Iowa, while Arizona may be closer to swinging Trump’s way. These must-win states for Trump would get him to 244 Electoral College votes, 26 short of the 270 needed. He would still need North Carolina and Pennsylvania to swing his way, or one of those plus Wisconsin or Michigan.  Pennsylvania remains critical for Trump’s chances. Despite a colossal campaign focus, he is still behind by a wide margin. In 2016 the polls here were wrong by 2.6%. This time he needs an error of 4.2%

2. Timing

The current scale of pre-voting and different methods the States count adds to the complexity. Results in vital southern states such as Florida will likely be known earlier, while northern states (lower pre-counting) will come later. Pennsylvania could take a week. If it is a close result, we could be in for a long wait, with both sides heavily lawyered up. Super-forecasters have a 31% probability of a final Result by November 8 and 47% by November 26.

3. The Senate

The Senate will be a significant factor for potential fiscal stimulus size and the degree to which Biden could enact his policies. The race has become tighter, with a Democrat senate now at 55% probability. The close States to watch are Georgia, South & North Carolina, Iowa and Arizona. In Iowa and Arizona polls are now moving the Republican way in the Presidential race, which suggests the prospect of a 50/50 or 49 Dem / 51 Rep Senate is now possible. On election day Virginia could be a bellwether. It should be a comfortable Democrat win but can provide an early sign of turnout levels and a potential signal for trends in North Carolina – a critical swing state for the Republicans.

Economic outlook

Australian monthly credit data was in line with expectations at +0.1% month-on-month and +2.0% year-on-year, the first increase in five months. Mortgage credit grew 0.4% month-on-month, the highest level since August 2018, highlighting better performance in the housing sector. Owner-occupier credit was up 0.5% m/m (+5.4% y/y) and investor loans were up 0.1% m/m (-0.4% y/y).

Globally, European economic trends are softening as Covid cases rise, but we see policy easing. Asia and the US continue to hold up well, while globally, CAPEX is generally doing better than expected. Global Q3 GDP played out better than anyone hoped, but Q4 is now seeing downgrades.

US personal income levels have dropped as support packages have rolled off, but remains higher than at the start of the crisis. New jobs seem to be holding income levels at reasonable levels, whilst savings remain elevated assuring a buffer.  

The latest Covid surge does not appear to be affecting activity levels in the US. But it’s starting to have an impact on European activity according to the newest mobility data. The challenge here is that the policy response in Europe due to ECB limitations on funding to countries to provide additional stimulus. There is a clear risk that European economic signals will deteriorate meaningfully in the next few weeks.

News out of China’s plenum will be important this week. Currently, Chinese economic indicators continue to go reasonably well.


The critical issue is how the combination of the pandemic, US election and policy responses will impact on the potential for rotation in the market. We are at historical extremes when it comes to the outperformance of growth over value and also on the latter’s valuation premium. A relatively benign outcome and removal of uncertainty could trigger a rotation to underperforming value stocks.

In terms of performance, it was a big risk-off week – with nothing other than bitcoin working. There were several concerns (detailed above), but the fact that gold also underperformed suggests the market is cutting positions and awaiting outcomes in crucial issues over the next few weeks.

US results season kicked off with big tech broadly in line with high expectations but subsequently selling off. So far, we have seen materials and industrial earnings perform best versus expectations.

Australian sectors were down across the board. Staples fell only 0.15% while Energy shed 6.71% as a proxy for global growth sentiment. We saw domestic industrials affected by a further delay in re-opening borders. But we believe this will be short-lived and an opportunity to add to positions.

Coca Cola Amatil (CCL, +15.6%) was subject to a bid from Coca Cola European Partners. We see the deal as cleverly timed from the bidder’s perspective. We expected to see the stock rebound to levels nearer the bid price as a result of looser travel restrictions and cost-out initiatives – so the takeover premium looks light.

A takeover bid for AMP (AMP, +12.9%) signalled there is capital out there looking for opportunities, which is generally supportive for markets.

Elsewhere ResMed’s (RMD, +8.5%) result was better than expected, helped by short-term benefits from its ventilation business.

Iron ore prices held up well ahead of details for the economic plan from the Chinese 5th plenum this week, supporting Fortescue (FMG, +3.9%).

The underperformers were driven mainly by the macro themes. Disappointment on border relaxation drove stocks such as Flight Centre (FLT, -15.8%) and Sydney Airport (SYD, -10.4%). Broader concerns over the potential for lockdowns saw Aristocrat (ALL, -11.11) and Atlas Arteria (ALX, -9.5%) underperform. Otherwise, it was the energy stocks such as Beach (BPT, -11.6%), Oil Search (OSH, -11.4%) and Santos (STO, -10.4%) that lagged.

We had the first bank result from ANZ (ANZ, -4.9%), which was mixed. The good news was the bad and doubtful debts (BDD) provisions were lower, which helped drive a better capital position. But margins were softer, and the cost outlook was a bit higher due to the need for investment in technology. Provisioning has but cut by 3-4%. There is a silver lining though — the company acknowledges the outlook for BDDs looks better than feared. While too early to call, this could lead to EPS and DPS upgrade in future years.

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