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Weekly market update - 9th of November 2020

Written and accurate as at: Nov 09, 2020 Current Stats & Facts

The prospect of a Democrat White House and Republican Senate will limit the scope for dramatic policy changes such as higher corporate taxes prompting a relief rally.  Further assurance from the Reserve Bank of Australia helped our local market make a solid gain of 4.45% for the week.

US election

The likely outcome seems to be a Democrat in the White House, notwithstanding a myriad of legal challenges.  The “blue wave” did not emerge with the Democrats underperforming expectations in the House of Representative having lost nine seats so far, albeit should retain a smaller majority.  The Democrats also missed in the Senate as experts suggest a 52-48 majority to the Republicans. Notably with exception of Georgia as it may not reach the 50 per cent threshold needed for a result.

Uncertainty remains about the current administration’s next steps. These include potential legal challenges before the Electoral College meets on December 14 and any other actions President Trump may take before he relinquishes the office next year.

The likelihood of a divided government likely means less chance for some of the more contentious policy changes such as higher taxes.  Biden is likely to preside over a more centrist cabinet, potentially taking some of the more left-wing agenda off the table. Biden has a strong relationship with Republican Senate leader Mitch McConnell, which may be constructive for a degree of co-operation.

Covid outlook

Cases continue to deteriorate throughout Europe and the US. Increased positive test numbers indicate a continuing rise in momentum.  Total US hospitalisations are at 50,000 versus a previous peak of 60,000. They are now spread over a wider geography but there are no signs of strain on the system yet. This remains a key factor to watch with an additional 100 new hospitalisations per day.

The market seems to be taking a sanguine view of lockdowns at this point and appears to be looking through this wave of Covid due to:

  1. A better understanding of the virus
  2. Improved healthcare system preparation
  3. A view that lockdowns work within a reasonable time frame
  4. Policy ready to plug the economic gap
  5. Liquidity so prevalent any sell-off can be quickly supported
  6. We may be weeks away from a vaccine

There was news of a new COVID strain emerging in Denmark. This highlights one of the potential risks to vaccine effectiveness.  There were positive signs for a new therapeutic – Humaningen’s anti-GM-SF antibody – which showed 37 per cent improvement in outcomes in a hospital study. The trial is expanding, with a potential filing for approval in Q1 2021.

Economic outlook

There was another step up in total jobs in October, driven by a recovery in leisure, hospitality and retail.  The data signals a positive picture for industrial activity across most of the globe with Australia being particularly strong in this regard.  Short-term retail survey data in the US was a bit weaker. This may be partly related to the election, but rising cases may be beginning to have some effect.

Last week’s Chinese plenum (meeting of the Central Committee of China’s Communist Party) was broadly in line with expectations of the focus on growing new industries and encouraging more self-sufficiency.

Market outlook

There was a reversal of the previous week’s sell-off with equities, bonds, commodities and gold all experiencing solid gains.  The market was supported by what’s starting to shape as a good US earnings season. Expectations have been soft and a stronger recovery in Q3 GDP has flowed through into corporate earnings. Among S&P 500 companies, 86% beat their quarterly earnings estimates, versus a long-term average of 65%.

Australia had a strong week led by REITs, industrials, and discretionary stocks, while defensives lagged.  Our market got an additional kicker when the RBA cut rates 15bp to 0.1%. Perhaps more importantly the Reserve cut the target level for 3-year bonds, launching a $110 billion six-month Quantitative Easing program, reinforcing the message that rates will stay effectively at zero for three years.

The prospect of further trade friction with China remains a risk. There has been speculation of additional measures on some goods – for example, low-grade iron ore. At this point, Beijing may be happy to keep additional threats in the conversation without acting on them. But this issue must be watched.

Several positives are lining up that can support the market into the year’s end.  These include:

  1. Supportive global markets
  2. Fiscal stimulus from Budget flowing through
  3. Melbourne re-opening, perhaps more quickly than hoped
  4. Borders re-opening
  5. Pent-up demand as Australians stay home for Christmas
  6. More stimulus from the RBA
  7. Cautious positioning from investors
  8. Potential for mergers and acquisitions (M&A)

We have seen results from three of the banks in the past fortnight, and the outlook remains unconvincing.  Revenue trends remain challenged. Credit growth, while stabilising, is still low. Margins remain under pressure and any tangible benefit from their cost reduction strategies won't be realised for at least a couple of years.

However, they remain propped up by the likelihood of lower bad and doubtful debts (BDDs), which supports the capital position and headline earnings, bolstering the dividend yield. Without BDD deterioration it is hard to see the sector underperform materially. But neither is there many catalysts for outperformance.

The Macquarie (MQG, +6.9%) result was messy, with uncertainty around potential performance fees and write-downs, but no negative surprises.  We saw Amcor (AMC, +8.5%) report Q1, which was positive with a small upgrade driven by better volumes in North America and improvement in some emerging markets.  Tabcorp (TAH, +24.6%) was the strongest in the ASX 100 last week, following rumours of a bid for either the wagering business or the entire group. AMP (AMP, +11.1%) rose as the takeover bid here was formalised.  REITs were strong on re-opening hopes and potential for M&A.  Vicinity (VCX) was up 15.7%, Scentre Group (SCG) lifted 14.3% and Stockland (SGP) rose 14%. Hopes of looser restrictions also boosted Flight centre (FLT, +24.4%).

Gold stocks recovered on the back of commodity move, led by evolution (EVN, +12.8%).  On the downside, tensions over trade with China — fuelled by Communist-party aligned media — weighed on Fortescue (FMG, -4.7%), Treasury Wine (TWE, -4.6%), Iluka (ILU, -0.2%) and A2 Milk (A2M, 0.3%).  Dominos (DMP, -0.3%) reported a slowing of the very strong pace of sales growth.

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