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Weekly market update - 16th of November 2020

Written and accurate as at: Nov 16, 2020 Current Stats & Facts

Equity markets experienced strong gains last week with the local market gaining 3.6% and is now down only 1.43% year-to-date. The S&P 500 was up 2.21%as positive news on the Pfizer vaccine outweighed a continued surge in US Covid cases.

Latest vaccine developments

Pfizer announced interim results of its vaccine trial which show an efficacy rate of 90%. This means the number of infections in the vaccine group was 90% different from the placebo group.  This is much better than expected and has material implications for the time it could take to effectively suppress the virus. A 75% efficacy rate could take 6-to-12 months to see suppression, while this could be cut to a couple of months with a 90% rate.

There is some concern about distribution given the vaccine needs to be kept cold. Pfizer plans to retain control of the distribution process. They will make and freeze the vaccine at -70 degrees Celsius and ship it in dry ice, keeping it stable for 15 days. Once at a destination it can be stored at 2-8 degrees, keeping it stable for five days.  This is a positive development. There are expectations the data could be ready for emergency FDA approval by the end of November.

Expect Moderna to report its trial interim results early this week. They have already said the threshold of infection numbers in their vaccine group has been met. Moderna’s vaccine could trigger a more durable immune response than Pfizer’s. 

Covid outlook

The vaccine news was critical because it appears the US is facing a surge in hospitalisations and deaths.  Daily new cases rose 40% last week versus a 20% gain the previous week. Given a sharp drop in daily new cases in places like France, where lockdowns are in place, the US is now in line with the EU in these terms.

Total US patient count is now above the peak during the summer wave, although cases are more evenly distributed across the country this time.  The tests positivity rate has climbed above 10% for the first time since May. There are reports of issues with testing capacity, which can lead to delays in turnaround time and an under-reporting of case numbers.

Hospitalisations typically lag case number trends by a week, suggesting we could see a surge in the next few days. Some 26 States are now at their highest levels of hospitalisations and 17 are at their peak level of Covid-related ICU patients. ICU capacity remains reasonable in most States. This must be watched in the coming weeks.  Localised restrictions are in place in Chicago and in Utah. A number of the States have reduced bar opening hours and the size of gatherings. Any signs of capacity strain are likely to trigger more restrictions. There is concern about the potential impact of Thanksgiving-related travel.  With the rise in cases, the US is seeing early signs of activity slowing — notably in retail and preparedness to leave home. Company and retail surveys have ticked down in recent weeks, as have consumer sentiment indicators. 

The impact of greater restrictions is a key risk. As it stands today, markets seem of the view that lockdowns can quickly control the spread and that policy measures and an imminent vaccine can smooth the economic impact.   

Markets outlook

The vaccine announcement lifted equities last week alongside oil, iron ore and copper. Bonds and gold sold off.  The US equity market is now up just shy of 10% for the month and is looking over-bought on some measures. There is potential for some volatility or a technical correction brought on by rising case numbers.  The Australian market is almost back to flat for 2020. 

The strength in value was reflected in sector performance in the S&P/ASX 300, with energy (+13.9%), industrials (+6.5%), financials (+5.9%) and REITs (+4%) all doing well. Defensives such as staples (-0.7%) and utilities (-1.5%) underperformed, as did growth (Technology +0.5%).  Gold stocks such as Saracen (SAR, -9.52%) and Northern Star (NST, -8.76%) were the worst performers in the ASX 100. Some Covid beneficiaries such as Dominos Pizza (DMP, -6.34%), NextDC (NXT, -6.25%) and JB Hi-Fi (JBH, -6.03%) softened.  Oil and LNG stocks did best. Oil Search (OSH, +30.25%) was the strongest stock in the ASX 100, helped by speculation that PNG prime minister James Marape may be under pressure. Beach (BPE, +23.89%) and Santos (STO, +18.03%) were strong.  Travel stocks responded to expectations of further domestic re-opening. Sydney Airport (SYD) was up +13.32%, Qantas (QAN) +12.31% and Flight Centre (FLT) +11.78%.

Telstra (TLS) gained 11.79% following an AGM update where management clarified that the return-on-invested-capital (ROIC) target was 8%, up from the “above 7%” range outlined at their result. This is important because it removes much of the doubt around dividend sustainability. Telstra also outlined a restructure which will provide better scope for splitting out parts of the business, allowing monetisation of the value in areas such as infrastructure assets. This can help the company’s rating. 

Xero (XRO, +3.36%) delivered a good result. New subscriber growth softened in the US and UK, in line with expectations given the challenges in attracting new customers during the Covid period. However, the key metrics we are watching in those markets continue to track well.  There was stronger-than-expected subscriber growth in Australia – and particularly in New Zealand – which was surprising given these are already heavily penetrated markets. This may suggest a further post-Covid shift in mentality towards the importance of online cloud-based accounting.  There were also constructive signals around the development of the broader platform and ancillary services.  The stock price reaction was muted given a good outcome. However there has been some distortion in recent price action with XRO’s inclusion in a global index prior to the result. 

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