Is it September already?
It is almost unbelievable that family discussions around how we will spend Christmas will start very soon and with the end of the year in sight, it seems to have gone quick in terms of the lack of social events and interactions, holidays and the general variations of life.
Most of us have spent more time at home and limited what are usually standard hobbies, events and pastimes. The words ‘unique’ and ‘unprecedented’ have probably been used more in 2020 than almost any year in a long time. Investment markets have shown that their performance is intricately linked to virus outcomes. In modern times and the age of social media, there are more news sources and views promoted than ever before. It is our job to cut through the noise, consider the facts and ensure our clients are on the right long-term path, despite short term shocks and deviations.
COVID-19 has had a devastating impact from a health and economic perspective and our thoughts go out to all those impacted and their families. Those that have lost loved ones or who are unable to see their elderly relatives in their final days. Those that have lost businesses and succumbed to the financial pressure and hardship seemingly forced upon them.
We get this, we have sympathy for this. Our role however, as the financial stewards of you, our clients, is to look at the facts and to interpret these facts in the same way that investors and those impacting financial markets do. And although we are not out of the woods yet, when looking at the facts we can’t help but think that there are actually some positives from a financial and investment market perspective, or in fact, that the negative press may be overdoing it, as they often do.
Following on, we spend the next part of this update taking you through where the world is, from a virus perspective. Some of this may sound very different to what you are reading and hearing from politicians, health officials and the mainstream media. Politicians and health officials can be at risk of politicising the virus and the way it is handled. We’ve also seen that health officials now exert huge influence over state and federal economies.
Virus facts at time of writing are as follows [1]:
There are more than 100 vaccine candidates under evaluation, more than 20 in clinical testing, and 6 in phase three trials – 3 western companies and 3 Chinese companies. At this stage, all 6 are likely to make it through phase three trials, and the 3 western company’s vaccines are all highly scalable. Assuming phase three success, it would be expected that we should have emergency use authorisation before the end of this year with mass production (500m to 1bn doses per company per year) beginning early next year. This is very promising as it pertains to economic re-opening and travel.
Regarding a vaccine, two other considerations include likely dosage and required vaccine take-up. At this stage, it is expected that the dosage is likely to be a first vaccine followed by a booster a couple of weeks later. Then a single shot each year after that as part of the usual flu vaccine before flu season starts. In terms of required vaccine take-up, the science currently shows that 20-25% take-up would be sufficient to encourage some sort of herd immunity, but obviously the more people that take it the better.
Investment markets have continued to perform strongly in light of improving news on the virus front and optimism regarding an early vaccine, whilst extraordinary government and central bank stimulus has supported investor sentiment and asset price inflation, particularly equities and corporate bonds. Both governments and central banks have made it abundantly clear that they will keep providing support until there are clear signs of a sustained economic recovery. That support means direct payments to households and businesses, cash rates at essentially zero, and very low borrowing costs for governments and corporates.
It is likely that Government support will need to be adjusted in 2021 as the current pace of direct handouts are difficult to maintain. But governments around the world have plenty of tools in their toolkit including labour market reform, tax reform, re-education / retraining of the workforce, infrastructure and others; a few which we’re likely to see early next year, whilst central banks have made it very clear that they too are committed to doing whatever it takes to get inflation higher and unemployment lower. The game changer will be potential early vaccine. If that eventuates, then new stimulus does not have to be that much larger from here and can instead be more targeted to those industries where recovery may be more structural. If early vaccine does not eventuate, and governments continue on the path of lockdowns, then new stimulus will have to remain large and wide for some time.
On the asset performance front, returns for both calendar year 2020 and since the March lows are shown in the table below (in AUD):
Calendar year to date (in AUD)
Since March lows (in AUD)
US Tech 26.3%
US Tech 34.9%
Asian equities 6.8%
Australian equities 34%
Global bonds 3.2%
US equities 22.6%
US equities 2.9%
European equities 21.4%
Chinese equities 2.5%
Emerging Market equities 16.2%
Aussie Bonds 1.92%
Asian equities 16.2%
Aussie Cash 0%
Global bonds 8.3%
Emerging Market equities -3.4%
Chinese equities 5.1%
Australian equities -7.7%
Aussie bonds 0.5%
European equities -10.1%
Cash 0%
US tech, and global tech to a lesser extent, has been the clear winner, hardly surprising in terms of leading the pack, but very surprising in terms of the magnitude. Australian equities have bounced back strongly since the March lows. Gold is not in the table above, but has rallied strongly year to date, as have gold company share prices.
The commitment by governments and central banks to do whatever it takes, and the current optimism regarding an early vaccine, are positives for risk assets (shares and property) from here. The US election result may cause some consternation, but investors are clearly focused on virus outcomes. 2021 will be interesting for investment markets depending on what changes we see to government and central bank policy.
US-China tensions have escalated yet again which is not surprising leading into a US election. In addition, Australia-China tensions are probably at the worst in multi-decades, with the Chinese limiting/hampering meat exports, then barley, then education/tourism (China has advised their people not to travel to Australia, not that they can at the moment anyway), and now wine is under attack on spurious anti-dumping grounds. This could continue to get messy. Hopefully the US and China can find a way to co-exist as highly competitive superpowers, but if they can’t, then there may become a time in the not so distant future where Australia has to pick a side. That will not be pleasant.
On the US election front, we now have Joe Biden and Kamala Harris leading the Democrat charge. Early this year, Trump was the clear favourite. That then swung completely around post virus with the polls clearly in favour of Biden and the Democrats. However, more recently Trump and the Republicans seem to have made up some ground. We will see what unfolds from here and who comes out better after the debates, assuming they are held.
Closer to home, it is fair to say Daniel Andrews is doing it tough down in VIC with calls for his resignation, whilst Queensland goes to the polls soon where we’ll see whether Queenslanders have lost or maintained their faith in Annastacia Palaszczuk’s leadership through the virus. PM Scott Morrison recently enjoyed high approval ratings however he too is coming under pressure.
At this stage, from an investment perspective, staying the course remains the best course of action. Diversification remains key as always. Dollar Cost Averaging (progressively investing new money coming from cash) into the market is prudent in order to smooth shorter term returns. Central banks will continue on the path of loose monetary policy with record low interest rates here to stay for the foreseeable future.
The Australian equity market (as measured by the S&P/ASX 200) started the year off much like the previous finished, although most of the steam had been taken out of the rally with January producing a solid +1.20% return. February was much more muted with the uncertainty of an imminent reporting season hanging over the market however with better-than-expected results, coupled with softer-than-expected domestic inflation data, March provided some highlights as Australian shares hit new record highs. The quarter ended on a high with March producing +3.27% closing the quarter off with an attractive +5.53%.
2023 made for another very interesting year in investment markets as macro / regime driven events resulted in extreme shifts in investor sentiment on an almost monthly basis. Investors chose to shoot first and ask questions later in what can best be described as a year of maximum noise.
The Australian equity market (as measured by the S&P/ASX 200) started the September quarter with a flurry but ended up in the red as the global “higher-for-longer” narrative (interest rates) coupled with the ever-increasing cost of living concerns caused consumer confidence to wane.