Dennis

After such strong returns in November it was no surprise to see markets take a slight pause in December particularly when considering the rise in COVID-19 cases in the northern hemisphere and the increase in lockdowns in response to growing case numbers will impede the rate of recovery for many economies in the near term. A new variant of COVID-19 has emerged which is more transmittable however it does not appear to be more severe than the original strain. Pleasingly, COVID-19 vaccinations are starting to be rolled out however the Pfizer/BioNTech vaccine is yet to finish stage three trials, but due to the rise of cases in the UK and US “emergency approval” has been granted to start vaccinating now. Australians will have to wait until at least March and due to two doses being required and lack of supply the vaccination will be only available to 5 million Australians initially with priority to the elderly and those with health issues.

The US signed into law a US$892 billion pandemic aid and stimulus package that will restore unemployment benefits to many Americans and in addition a $1.14 trillion spending bill to fund the government for the next nine months was also passed that has averted a partial federal government shutdown. The UK have finally exited the European Union with the following statement issued by the UK Government “The deal … guarantees that we are no longer in the lunar pull of the EU, we are not bound by EU rules, there is no role for the European Court of Justice and all of our key red lines about returning sovereignty have been achieved. It means that we will have full political and economic independence on 1st January 2021”.

The Australian equity market rose slightly in December, the ASX100 up 1.1% with Technology stocks (+10.7%) and Material stocks (+8.9%) leading the way whilst Healthcare stocks (-5.1%) and Utility stocks (-5.8%) were the laggards. Chinese trade sanctions on some of Australia’s exports e.g. wine, beef, coal, cotton. will impact the domestic economy. Despite this, Chinese demand for Australian iron ore remains strong with prices moving towards the 2011 peak is helping improve Australia’s terms of trade and buoy the Australian dollar.

International equities rose by 3.5% on a currency-hedged basis while a higher AUD (up 4.6% vs the US Dollar to close at US$0.7694) lessened the return slightly for unhedged investors to -0.5% for the month. Over the 12 months the differences between equity returns across various regions is vast (in local currency); US equities (S&P500) +16%, UK equities (FTSE100) -14% , European equities (EUROSTOXX50) -5%, Asian Equities (MSCI Asia-ex Japan) +22%.

The Australian yield curve steepened in December with the 10-year government bond yield rising 7bps to 0.97% whilst the 2-year government bond yield fell by 4bsps to 0.07%. In the US the 10-year government bond fell also rose by 7bps to close at 0.91% and the 2-year government bond yield was fell slightly by 3bps to 0.12%. This movement in fixed income markets is highlighting that short-term risks to economies is real and central banks will suppress interest rates for as long as needed, but markets believe that over the medium to long term inflation risks are a high probability given the amount of stimulus being supplied.

One of the beneficiaries of investors adopting a more “risk-off” stance in December was Bitcoin which gained more than 50% over the month. The crypto currency took 10 years to breach the US$20,000 per Bitcoin level and the price surged through US$30,000 per Bitcoin in less than a month. Investor are concerned about central bank money printing in response to COVID-19 which has been cited as one of the key factors in driving demand for Bitcoin due to its finite supply. Additionally, gold, due to its store of wealth, gained 6.6% in USD in December.

Benchmark Returns 31 December 2020

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RESEARCH INSIGHTS IS A PUBLICATION OF AUSTRALIAN UNITY PERSONAL FINANCIAL SERVICES LIMITED ABN 26 098 725 145 (AUPFS). ANY ADVICE IN THIS ARTICLE IS GENERAL ADVICE ONLY AND DOES NOT TAKE INTO ACCOUNT THE OBJECTIVES, FINANCIAL SITUATION OR NEEDS OF ANY PARTICULAR PERSON. IT DOES NOT REPRESENT LEGAL, TAX OR PERSONAL ADVICE AND SHOULD NOT BE RELIED ON AS SUCH. YOU SHOULD OBTAIN FINANCIAL ADVICE RELEVANT TO YOUR CIRCUMSTANCES BEFORE MAKING PRODUCT DECISIONS. WHERE APPROPRIATE, SEEK PROFESSIONAL ADVICE FROM A FINANCIAL ADVISER. WHERE A PARTICULAR FINANCIAL PRODUCT IS MENTIONED, YOU SHOULD CONSIDER THE PRODUCT DISCLOSURE STATEMENT BEFORE MAKING ANY DECISIONS IN RELATION TO THE PRODUCT AND WE MAKE NO GUARANTEES REGARDING FUTURE PERFORMANCE OR IN RELATION TO ANY PARTICULAR OUTCOME. WHILST EVERY CARE HAS BEEN TAKEN IN THE PREPARATION OF THIS INFORMATION, IT MAY NOT REMAIN CURRENT AFTER THE DATE OF PUBLICATION AND AUSTRALIAN UNITY PERSONAL FINANCIAL SERVICES LTD (AUPFS) AND ITS RELATED BODIES CORPORATE MAKE NO REPRESENTATION AS TO ITS ACCURACY OR COMPLETENESS.

Positive trial data for three potential COVID-19 vaccines was a key catalyst for investment markets in November. Monthly gains during November were the largest since the late 1980’s with many indices posting new all-time highs. Whilst global cases of COVID-19 remain high at ~64 million cases with the US accounting for ~14 million of these, the mortality rate isn’t increasing at the same rate as new cases. Despite improved mortality rates and better treatment protocols for those with COVID-19 this doesn’t guarantee an unimpeded economic recovery. Lockdowns in some regions of Europe and the US will interrupt recovery and place further strain on some sectors of the economy such as the tourism and hospitality sectors.

In the US, President Trump hasn’t really conceded to losing the Presidency and still claims the result was rigged. However, Joe Biden has now been elected the 46^th President of the United States. President-elect Biden will have a challenging environment to enact his legislative agenda, with Democrats appearing unlikely to gain control of the US Senate.

Australian iron ore exports reached record levels in November as Asian demand continues to respond to increased infrastructure spending and accelerating economic growth in the region. A buoyant outlook for the Australian economy, bolstered by confirmation that the outbreak of COVID-19 in Victoria is under control, helped underpin a strengthening Australian dollar which gained 4.7% versus the US Dollar in November to close at US$0.7357. This was despite the Reserve Bank of Australia (RBA) lowering the official cash rate to 0.10% from 0.25% earlier in the month.

The Australian equity market rose by just over 10% in November as investors were happy to buy some of the sectors/stocks that have been hardest hit in the downturn and take profits in some of the companies that have been beneficiaries of the uncertainty.  Sectors such as Energy (+29%), Financials (16%) and Industrials (+12%) were amongst the largest gainers during the month. Consumer staples (-2%) and Health Care (+2.5%) were the laggards. International equities rose by 11.5% on a currency-hedged basis while a higher AUD lessened the return slightly for unhedged investors to 7.4% for the month. The Dow Jones Industrial Average which tracks 30 large US listed companies hit a record high of over 30,000 index points in the month, while the broader S&P500 and the technology-heavy NASDAQ also hit record highs in November. Australian listed property delivered a 12.8% return as lockdowns eased and investors were willing to purchase office and retail property stocks that had been heavily sold off during the last nine months.

The Australian yield curve steepened in November due to investors adopting a more “risk on” approach to investment markets in response to an increasing probability that the Asian region (including Australia) is nearing the end of the pandemic. The 10-year government bond yield rose by 7bps to 0.90% whilst the 2-year government bond yield was flat at 0.11%. In the US the 10-year government bond fell by 3bps to close at 0.84% and the 2-year government bond yield was steady at 0.15%.

Benchmark Returns 30 November 2020

Important information
RESEARCH INSIGHTS IS A PUBLICATION OF AUSTRALIAN UNITY PERSONAL FINANCIAL SERVICES LIMITED ABN 26 098 725 145 (AUPFS). ANY ADVICE IN THIS ARTICLE IS GENERAL ADVICE ONLY AND DOES NOT TAKE INTO ACCOUNT THE OBJECTIVES, FINANCIAL SITUATION OR NEEDS OF ANY PARTICULAR PERSON. IT DOES NOT REPRESENT LEGAL, TAX OR PERSONAL ADVICE AND SHOULD NOT BE RELIED ON AS SUCH. YOU SHOULD OBTAIN FINANCIAL ADVICE RELEVANT TO YOUR CIRCUMSTANCES BEFORE MAKING PRODUCT DECISIONS. WHERE APPROPRIATE, SEEK PROFESSIONAL ADVICE FROM A FINANCIAL ADVISER. WHERE A PARTICULAR FINANCIAL PRODUCT IS MENTIONED, YOU SHOULD CONSIDER THE PRODUCT DISCLOSURE STATEMENT BEFORE MAKING ANY DECISIONS IN RELATION TO THE PRODUCT AND WE MAKE NO GUARANTEES REGARDING FUTURE PERFORMANCE OR IN RELATION TO ANY PARTICULAR OUTCOME. WHILST EVERY CARE HAS BEEN TAKEN IN THE PREPARATION OF THIS INFORMATION, IT MAY NOT REMAIN CURRENT AFTER THE DATE OF PUBLICATION AND AUSTRALIAN UNITY PERSONAL FINANCIAL SERVICES LTD (AUPFS) AND ITS RELATED BODIES CORPORATE MAKE NO REPRESENTATION AS TO ITS ACCURACY OR COMPLETENESS.

October started as a “risk on” month for equities however from the 19^th October onwards markets started turning downwards. Australian equities ended the month slightly positive whereas international equities ended the month in the red. The rationale for this disparity is twofold. Firstly, COVID-19 daily cases in the northern hemisphere accelerated into the end of the month to a point of hitting record daily rates of infection in the US and in some European countries. Investors also looked to reduce risk ahead of the US Presidential Election in November. Conversely, Australian COVID-19 cases appear well under control with Victoria emerging from lockdown towards the end of October and state borders starting to open. Importantly, Australia’s major trading partners in the Asian region are also doing relatively well in managing COVID-19 allowing their economies to sustain economic recovery.

In early October Australia’s delayed Federal Budget was delivered by Treasurer Josh Frydenberg. Key features of the budget included Australia’s net debt to peak in 2024 at $966 billion – around 44% of Australia’s GDP – and the bringing forward of second stage personal tax cuts to bolster consumer confidence. The improvement in unemployment will be relatively slow with unemployment forecast to peak in December at 8%.

On November 3^rd the RBA, as highly anticipated, cut the Australian cash rate to a new record low of 0.1%, additionally the RBA announced further Quantitative Easing by committing to purchase A$100 bn of government bonds with a maturity date of between 5- and 10-years maturity over the next six months, this equates to the RBA owning ~15% of Australian government bonds on issue. The RBA also noted that it is unlikely that an interest rate rise will occur within the next three years.

The Australian equity market rose 1.9% in October with Information Technology (+11%) and Consumer staples (+5%) doing the heavy lifting whilst Industrials (-4%) were the main detractor. Overseas International equities fell by 3.2% on a currency-hedged basis while a lower AUD (down 2% against the USD to close at US$0.7028) helped lessen the losses for unhedged investors to -1.1% for the month.

In anticipation of an RBA rate cut on Melbourne Cup Day the Australian yield curve steepened in October with the 10-year government bond yield rising by 4bps to 0.78% whilst the 2-year government bond yield fell by 5bps to 0.11%. In the US the 10-year government bond rose 19 bps to close at 0.87% and the 2-year government bond yield rose by 2bps to close at 0.15%.

Benchmark Returns 31 October 2020

Important information
RESEARCH INSIGHTS IS A PUBLICATION OF AUSTRALIAN UNITY PERSONAL FINANCIAL SERVICES LIMITED ABN 26 098 725 145 (AUPFS). ANY ADVICE IN THIS ARTICLE IS GENERAL ADVICE ONLY AND DOES NOT TAKE INTO ACCOUNT THE OBJECTIVES, FINANCIAL SITUATION OR NEEDS OF ANY PARTICULAR PERSON. IT DOES NOT REPRESENT LEGAL, TAX OR PERSONAL ADVICE AND SHOULD NOT BE RELIED ON AS SUCH. YOU SHOULD OBTAIN FINANCIAL ADVICE RELEVANT TO YOUR CIRCUMSTANCES BEFORE MAKING PRODUCT DECISIONS. WHERE APPROPRIATE, SEEK PROFESSIONAL ADVICE FROM A FINANCIAL ADVISER. WHERE A PARTICULAR FINANCIAL PRODUCT IS MENTIONED, YOU SHOULD CONSIDER THE PRODUCT DISCLOSURE STATEMENT BEFORE MAKING ANY DECISIONS IN RELATION TO THE PRODUCT AND WE MAKE NO GUARANTEES REGARDING FUTURE PERFORMANCE OR IN RELATION TO ANY PARTICULAR OUTCOME. WHILST EVERY CARE HAS BEEN TAKEN IN THE PREPARATION OF THIS INFORMATION, IT MAY NOT REMAIN CURRENT AFTER THE DATE OF PUBLICATION AND AUSTRALIAN UNITY PERSONAL FINANCIAL SERVICES LTD (AUPFS) AND ITS RELATED BODIES CORPORATE MAKE NO REPRESENTATION AS TO ITS ACCURACY OR COMPLETENESS.