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Weekly market update - 7th of December 2020

Written and accurate as at: Dec 07, 2020 Current Stats & Facts

Equity markets remain sanguine with our local market gaining 0.55% and the S&P 500 surging 1.72% last week.  There are notable competing forces.

Negative factors include:

  • Polls indicate the Democrats may win both of Georgia’s Senate seats in the January run-off, which could hand them control of the Senate. The market has welcomed the prospect of divided US government. This could change that view.
  • Delays in approval for the AstraZeneca vaccine — pending more thorough tests — may mean countries outside of the US might not achieve herd immunity until the end of 2021.
  • There is some commentary around the potential for vaccine production to be held back by a lack of key inputs such as vials and needles.
  • There is potential for certain strains of Covid to be vaccine-resistant — specifically, the N439K strain which is rare but shown to be resistant to some antibodies in recovered patients.

Also, the recent strong run may mean we are in for a period of consolidation; although not necessarily a material pull-back.

Supportive factors include:

  1. Vaccine means a potential resolution to the impact of Covid is on the horizon.
  2. High case numbers, concerns on the economy and uncertainty on the roll-out of vaccines mean policymakers remain in the mindset of “whatever it takes”. Fiscal and monetary stimulus remains in place as a result.
  3. The Democrat win in the US — with Congress likely divided — means the end of the unpredictability of the Trump Administration, but a lower chance of a dramatic new policy agenda.
  4. China’s economy continues to outperform the rest of the world. Positive interest rates are attracting capital which supports the RMB and Chinese spending power. This is good for commodities.
  5. Australia is in the sweet spot of summer, Covid suppression and a potential vaccine before winter, providing a reasonably clear path for the economy.
  6. A Brexit deal possibly ends some uncertainty in Europe.

In the market, low-interest rates continue to support growth stocks, which are holding up well. Value stocks are benefiting from accelerating growth and greater earnings certainty all supported by substantial liquidity. This could suggest the current rally has decent breadth.

Covid outlook

Europe continues to improve, leaving the US as the flashpoint for the northern hemisphere wave.

It is still too early to read the consequences of the Thanksgiving break. The next two weeks will be important to determine if this has triggered a re-acceleration.

Regionally the worst states in the Midwest have begun to see some relative improvements. This has been offset by a re-acceleration in Florida, Michigan and New York — through some of this is a catch-up in post-Thanksgiving reporting. Some of the greatest strain on hospitals had been in the Midwest, so this is a marginal positive.

Hospitalisation growth broadly remains more limited than case growth at about 10 per cent. ICU occupancy improved marginally in the Midwest, which had been under some of the greatest strain. But we see a broadening of severe cases, making it harder to help the badly impacted states. There are also reports of healthcare staff shortages emerging.

Economic outlook

Total nonfarm payroll data for November was disappointing, suggesting the jobs rebound is decelerating. However, overall unemployment continues to fall.  This may not have too great an impact on Q4 GDP growth, given the strength in industrial production for export and to restock inventories. This continues to drive a disconnection with sluggish real-time mobility data — and the initial data for Cyber Monday retail sales — but suggests Q4 GDP may be stronger than many expect.

Softer payroll data raise the near-term chances of a fiscal package. Commentators suggest something in the order of $US500 million to $US1 billion. There are some signals the Fed may start extending the duration of the bonds it is purchasing.  Globally economic signals remain positive as industrial production ramps up, and the expectation of significant on-going fiscal stimulus drives industrial commodities.  Copper rose to a 7-year high. Iron moved higher too, as Brazil’s Vale announced a smaller-than-expected increase in production next year.  These moves in commodities have driven mining stocks globally. The US mining sector has broken back above pre-Covid levels, while it seems plausible Australian resources could do the same.


Ten-year government bond yields rose 12bps in the US and 10bps in Australia, reflecting the USD fall and the rise in commodity prices. This is supportive of the market’s value stocks.  The slow rise in bond yields may not impose as a negative for equities. It’s borne of higher optimism about future growth and a belief the Fed will be later in the cycle to raise rates than normal.

The implied message from central banks is that savers will have to take one for the team in terms of an extended period of low rates. This is beginning to be reflected in expectations of equity market performance — and in equity market ETF inflows, which have rapidly accelerated since the US election and vaccine news. This has the potential to be self-fulfilling. The bulk of flows go into index funds and get invested immediately, which may force some holdout investors back into the market.

US market valuations for the five largest stocks remain extremely elevated. Beyond this, the recent “catch-up” by other parts of the market has left their valuations looking full in historical terms. Nevertheless, there is the potential to rise further, particularly given the sharp recovery in earnings coming through.

In the Australian equity market, a sell-off at the end of November has quickly reversed. Resources led the way last week (+5.43%) while growth names (Technology +0.34%, Health Care -2.36%) and defensives (Utilities -2.18%, Consumer Staples -0.09%) lagged.  Again, macro factors were important at the stock level. Mining stocks have broadly consolidated for some months, but a weaker USD and stronger global demand have the potential to prompt a move higher relative to the market.

In this vein, copper miner Oz Minerals (OZL, +14.96%) was the best performer in the ASX 100. Fortescue Metals (FMG, +10.99%), Rio Tinto (RIO, +10.98%), BHP (BHP, +7.18%) and South32 (S32, +6.10%) were also among the leaders.  Small-cap mining services company Monadelphous (MND, +13.8%) did well as sector sentiment improved. MND announced several recent contracts wins including one from RIO. This is important because it helps calm fears that the ongoing dispute over liability for the Cape Lambert facility fire has damaged the wider relationship.

Outside of the miners, Metcash (MTS) was up 5.9% ahead of its result. Macquarie (MQG, +3.15%) announced the bolt-on acquisition of a US-listed fund manager. Magellan (MFG, -5.64%) was the worst performer in the ASX100. The market sees the recent rotation to value having an impact on potential performance fees and flows.  There was a broad weakness in health care, led by Ansell (ANN, -5.06%), Fisher & Paykel (FPH, -3.57%) and Cochlear (COH, -3.33%). The sector is possibly a funding source for a rotation to other, more cyclical parts of the market.

Qantas (QAN, -4.53%) also gave up some recent gains. It provided an encouraging update, with domestic capacity set to ramp up to 80% of pre-Covid levels. The debt was a little higher than expected. However, there was a lot of focus on the enterprise value (EV), which is returning to pre-Covid levels, potentially prompting some profit-taking from investors who bought it as a recovery play. In our view, this misses the impact of a large return of working capital, which is likely to drive the EV higher. We see more upside from current levels. 

Santos’s (STO, +1.76%) strategy day was supportive, a lot of emphasis on carbon capture as a way of enabling the company to continue to expand production over the medium term.

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