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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