Weekly market update - 21st of November 2020

Global markets continued to consolidate last week but managed to rise despite continued poor Covid trends.  The latest leg-up was largely attributed to a more constructive Fed meeting, growing confidence for a US fiscal stimulus package and decent news on the vaccine front.   Against this backdrop, the S&P 500 was up 1.3% last week and 16.9% higher for the calendar year to date (CYTD). In contrast, the performance of the S&P/ASX 300 Accumulation index has been more muted, edging higher by 0.5% over the week and +2.9% CYTD.

Several new or ongoing developments bear close watching:

1. Sydney outbreak containment – this is new and has obvious consequences for domestic re-opening stocks.
2. Will the global economy continue to surprise on upside? So far, actual data and data from surveys remain supportive globally.
3. Will the re-acceleration of US Covid cases lead to harder lockdowns and an economic slowdown? California is a key risk area, while the rest of the US is plateauing.
4. As we get more vaccine data, will we identify any material risks? The latest data from Moderna remains positive, while the China vaccines are also looking good.  The key risk is the new virus strain that has been spreading in the UK.
5. The ability to deliver effective vaccine on a necessary scale. There has not been any breaking news on this front, although there is potential for a one-dose vaccination for Moderna.
6. Fed policy update – signals from the central bank have been marginally positive. The growth in its balance sheet continues to be strong.
7. US fiscal deal – the odds are rising for a circa $900 billion deal. 
8. Georgia primaries – the polls are tight, and the Republicans are now marginally ahead.
9. Brexit negotiations – still very much on the line.

Covid

Cases in the US continue to rise, and Europe has started to deteriorate again. In the UK concern centres on the rise of cases in London, and the focus has been on a potentially new strain/variant of Covid-19. While it has proven more infectious, there is no evidence to suggest this new strain will make people sicker or is more resistant to vaccines. The latter is critical to market sentiment.  

US cases are plateauing at higher levels though a rise in California — and to a lesser extent Texas — is leading to a continued increase in numbers. California has imposed stricter restrictions as a result.

Overall cases were up 4%, potentially signalling hospitalisations rates should continue to slow. This remains key for economic consequences. It is worth noting that no region in the US has yet reached the same pressure on its hospital system as the Northeast did in April. Regions with the most strain on their hospital systems — such as the Midwest — have been improving.

Vaccines

New data from Moderna indicates single-dose efficacy greater than 90% (though this was from a smaller trial). This leads to an interesting policy debate about the potential of shifting from Pfizer to Moderna for faster near-term-roll out. This could receive more attention if distribution issues become evident.

Policy

The Fed and US fiscal policies provided other key news points last week. The provided a small net positive after committing to maintaining a high monthly asset purchase rate (Treasuries $80b/month and MBS $40b/m). However, they didn’t announce plans to extend the maturity of purchases. The message from the Fed is clear. They plan to continue with a high level of balance sheet expansion until unemployment returns to low levels. Interest rates are not expected to rise by the end of 2023 (according to 12 of 15), even though the unemployment forecast sits at 3.7%.

US fiscal is still in the balance but there now seems a pathway to a fiscal deal during the lame-duck period — in the order of $US900 billion. The main area of debate relates to the size of an up-front payment and duration for the extension of UI payments. The stimulus is likely to be front-end loaded, having the most effect in Q1 as the vaccines are rolled out.

Economy

Despite worsening health news and greater restrictions, the economy is holding up better than expected. This is despite softer consumer confidence and shoppers holding back from physical retailers and restaurants. November retail sales were softer, but real times measures suggest this may have picked up again. Surveys for holiday sales continue to look ok, with a substantial shift to online.

We continue to be positive, going into CY21, taking into account the following factors:

• Decent growth momentum (US Q4 GDP likely to be +4-8%)
• Vaccine optimism
• Pent-up demand — the flow of savings has doubled in the US, and an unwind of savings rates will support growth.
• Housing markets are strong, and construction and pricing will be underpinned, which in turn supports consumer spending.
• Policy, as highlighted above, remains very supportive for liquidity and therefore markets as well as propping up consumers.
• China remains in a decent shape and is unlikely to make any dramatic policy shifts given the uncertainty from the rest of the world.
• A weaker US$ — this is a consequence of the other factors, but also a reinforcing factor as it supports emerging markets and commodities.

Markets

The momentum factor continues to track along this year, recording its best performing year for more than two decades despite the recent value rotation. This raises the question of its sustainability next year. Globally asset prices continued with the same theme —the US long-term bond yield backed up by 7bp while the US dollar weakened and commodities continued to move higher. Bitcoin highlighted the level of liquidity in the market, gaining 27%. Gold also has begun to bounce.  In the domestic market, discretionary retail outperformed while energy lagged. The key issue from here is how the market will react to the Sydney outbreak. 

We saw several key company updates last week.

Nine Entertainment (NEC, -0.8%) upgraded revenue for Dec as advertising rose from 30 to 40%. Brands are trying to get in front of consumers after a tough 2020. While the recent outbreak could derail this in the short term, several analysts believe the trend will continue from here.

A2 Milk (A2M, -22.4%) posted a huge downgrade, with revenues 20% lower than expected while margins fell to 27% from 30. The two factors equated to a downgrade of more than 30%. The company explained the downgrade as a function of weak Daigou demand, which also impacts on the cross-border e-commerce channel. However, some suspect A2M has either got caught out with too much inventory in various channels (infant formulas have a relatively short shelf-life) or is suffering from the loss of China market share to local brands as demand shifts to channels A2M is not as exposed to. If so, the issue is a structural one and would require investment in marketing and distribution — which may further impact margins.

QBE (-10.8%) had a disappointing downgrade as the interim CEO flagged more prior-year reserving while indicating higher catastrophic costs/reinsurance. The scale of the reserving, while for different reasons to IAG (-3.3%) leaves the same issue — either indicating a business that has managed risks poorly or is being conservative under new management. The downgrades are 5-6%, and the stock currently trades on 11-12x. Nevertheless, QBE is benefitting from a continued rise in premium rates increases, which are now running at close to 10%.

Viva Energy Group’s (VEA, -6.8%) market update was in line with expectations. The stock reacted negatively to some headline downgrades relating to derivative revaluation, despite a small beat in the underlying profits. The market may also be wary that it looks like VEA could keep its refinery open. This may occur if the fuel security program from the government helps support returns for the company.

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