The Australian equity market (as measured by the S&P/ASX 200) continued its recovery surging (+13.7%) in the December quarter, underpinned by a rise in sentiment as positive vaccine trials and rollouts became closer to realisation. After a tough finish to the September quarter, the market slowly began to recuperate in October as the release of the federal budget provided confidence that fiscal policy was to continue supporting the economy. A further rate cut in November coupled with easing of restrictions saw the market power ahead, building on the rotational trade into cyclical sectors which had begun the month before. As a show of resilience, the share-market ended calendar year 2020 in the black, posting a return of (+1.4%).
Quarterly returns across all sectors, except Health Care and Utilities, reflected the confidence and optimism that had grown during the quarter. Supported by the iron ore price (+32%), cyclical sectors (Energy +26.3%, Financials +22.8%) led the way, ably supported by Materials (+15.4%), Real Estate (+13.7%) and Consumer Discretionary was up (+11.1%). Information technology continued its impressive run, returning (+24.8%) whilst Communications Services also provided a double digit return of (+12.3%).
As the large cap sector continues its recovery, opportunities outside the top 100 – mid and small-cap sectors - continue to present attractive opportunities culminating in impressive outperformance, (+15.5%) and (+13.8%) respectively for the quarter. (+13.4% and +9.2% for the calendar year 2020).
All major developed and emerging markets, although performing well for the quarter, underperformed the Australian market due to the continuing rise in the Aussie dollar. In the US, the lead-up to and US Election, or more of note, the outcome, proved to be the trigger to set-off market uncertainty and volatility not only locally, but globally.
Coupled with second and third waves of COVID-19 running rampant across the world, the December quarter will be one spoken about in years to come; the S&P 500 managed however to return a solid (+4.0%) in AUD terms as optimism gained traction as a result of a large fiscal spending US Democratic party winning office. Emerging Markets (as measured by the MSCI EM index) returned a strong (+11.2%); Europe (as measured by the STOXX Europe 600 index) returned a solid (+7.1%) whilst the MSCI AC Asia Ex Japan also recorded a strong return of (+10.2%); all of which aided by further optimism towards a COVID-19 vaccine and cyclical recoveries. Positive currency movement relative to the USD and commodity price support also provided further assistance to market appreciation.
PROPERTY & INFRASTRUCTURE
The Australian listed property sector (S&P/ASX 200 A-REIT) also benefitted from the rotational trade into cyclical sectors during the quarter returning (+13.3%) however the sector remains structurally challenged (divergence in performance across sub-sectors) due to the pandemic, slowing / re-opening economy. This is evident in the calendar year return with the sector falling (-4.6%). Global listed property (+10.2) and global listed infrastructure (+5.9%) provided solid returns for the quarter on a currency hedged basis, however the continuing appreciation of the Aussie dollar hurt unhedged returns (5.8%) and (0.9%) respectively.
BONDS AND CASH
The RBA and central banks globally remained accommodative in support of bond markets via stimulus programs. Yields on 10-year treasures, both domestically and globally, rose slightly during the quarter as confidence grew off the back of vaccine news. Bond returns were again however muted in the December quarter. Australian bonds (Bloomberg AusBond Govn 0+Yr) hit negative territory on a real basis (-0.3%) whilst global bonds (BBgBarc Global Aggregate TR Hedged) were slightly positive (+0.8%). Corporate bonds squeezed a little more spread during the quarter and continued to outperform government bonds; Higher yielding bond assets remained broadly buoyant with cooperative monetary policy in place; Cash yields took another hit as the RBA cut the official rate in November to its lowest in history, dropping to 0.10%.
It’s fair to say the December quarter of 2020 will be remembered for some time, packed full of events and market gyrations.
We had virus outcomes worsen over the quarter as the northern hemisphere entered their colder months, which resulted in an increase in cases and hence an increase in restrictions and lockdowns. On the positive side, we saw the announcement of successful phase 3 trials for three different vaccines, with two granted emergency use authorisation before the end of the year.
We also had the US election result, or lack thereof for some time, as ballots continued to be counted well after election day. President Trump, his legal team, and others launched numerous challenges regarding the outcomes in certain cities and state, but to no avail, with Joe Biden and Kamala Harris all but confirmed as the new 46th President and Vice President of the USA. The election result also saw the Democrats retain the House but with a smaller majority, whilst the Senate remained undecided as the state of Georgia had a runoff to confirm their two seats. Leading into the election, most had a mixed or messy election result being negative for markets, but investors seemed to find positives in the result.
The UK and the European Union (EU) finally struck a trade deal with no time to spare before their self-appointed deadline, which saw the UK finally and formally exit the EU.
Closer to home, there was plenty to assess and absorb. On the virus front, politicking over state borders continued, whilst we also saw increased restrictions leading into Christmas on a relatively small number of cases. We had important announcements on both the fiscal and monetary policy front with the Federal Treasurer handing down one of the biggest budgets in decades with deficits expected for the next 4-5 years and federal debt likely to clear the trillion-dollar mark in the not-so-distant future, all in the name of helping the economy recover from recession in 2020 and to assist in kickstarting the recovery in 2021. This was followed up with a big, but expected, announcement from the Reserve Bank of Australia where they lowered the RBA Cash Rate to an all-time low of 0.1%, provided the banks with cheap borrowing lines to encourage them to lend, and kickstarted Australia’s first foray into quantitative easing (QE) with a program for $100 billion. Lastly, but not least, AustraliaChina relations continued to sour over the quarter, with the Chinese targeting almost all Australian exports with exception of iron ore.
From a market perspective, investors focused on the positives in the quarter with successful phase 3 vaccine results resulting in a very aggressive rotation into cyclical and Covidexposed sectors and stocks, whilst continued support from government and central banks along with a Joe Biden presidency likely leading to considerably more US fiscal support led to broader support for markets, particularly growth assets. Cash and bond returns, whilst positive, were weak given extremely low central bank cash rates and very low bond yields, with significant bond buying by central banks continuing through their quantitative easing programs. Assets denominated in Australian dollars performed strongly as the Australian dollar rose on soaring iron ore prices whilst the US dollar continued to weaken.
The outlook looks rather positive from here considering the continuation of considerable fiscal and monetary stimulus, which along with the vaccine rollout picking up pace, should see economies re-open and a subsequent strong bounce in economic growth. At the same time, given the low returns on offer from defensive asset classes like cash and bonds, we’re likely to see significant weight of money flow into growth asset classes like equities, property, and infrastructure. Household savings rates are very high, cheap debt is on offer for both households and businesses, and we’re likely to see government invest considerably in infrastructure.
In saying that, governments and their health advisers have bet the farm on vaccines being their only solution to eliminating lockdowns as a policy response. As such, risks remain regarding the rollout of the vaccine and the willingness for people to take the vaccine. In addition, the economic damage caused in 2020 won’t be repaired and recovered for some time, and some sectors and businesses won’t ever recover. Last but not least, inflation is back on the agenda given the significant fiscal response we’ve seen and are likely to continue seeing. Inflation, and inflation expectations, presents both opportunities and risks, whilst also requiring different portfolio settings and resulting in different portfolio outcomes.