News, Views, and Commentary: Dec 2020

It’s amazing the difference a little certainty makes…….. 

November was a massive month for global financial markets. Two of the biggest uncertainties facing the markets were resolved in ways which led global investors to become much more bullish about the outlook as we move out of 2020 and into 2021.

First, the US election is now out of the way and Joe Biden has beaten Donald Trump for the White House. The markets no longer need to fear a (reasonably) contested election and, further, if the Republicans retain the Senate majority in January this will be viewed as a ‘safe’ result for financial markets. Second, the news of successful vaccines for Covid-19 marked a sea-change in investor sentiment, even though big waves of the virus are rolling through Europe and the US. These factors, plus the prospect of further policy support – since confirmed – triggered a big risk-on move in financial markets.

Equity markets had one of their biggest months on record with double-digit returns across the board, as the chart below shows. Quite stunning for a single month.   Real Estate Investment Trusts, Infrastructure and bank stocks also did well and beat the broader market indices. The common features of these outperforming sectors is that they are cyclical in nature and have for most of the year lagged the rest of the markets.  In other words, strong bounce-backs, which again shows the value of sticking to a strategy of blending and diversifying.  The upward trend has continued into December though at a more normal rate, and the US market has peaked past 30,000 points.

 

The A$/US$ rose with the iron ore price, as well as general US$ softness. The price of gold fell nearly 6% in November as investors perceived less need for it as a safe haven asset after the news about the vaccines. Gold was already looking expensive compared to underlying fundamentals, especially bond yields, and was poised for a correction.  There is an interesting video about investing in gold further in the Newsletter.

Commodity prices like oil and iron ore do well when global growth improves. In the case of the oil, hopes of a resumption of airline travel helped deliver a 27% price rise in the month of November. Iron ore did well on some positive growth figures from China. The price of iron ore is especially important for the A$ so it is not surprising our currency rose 5% in November. However, the A$ was also helped by general softness of the US$ which is regarded as a risk-off currency. That is, the US$ tends to do better when global growth is slowing because it is seen as a safe haven asset. The higher A$ poses a problem for the Reserve Bank which wants to see the currency weaker rather than stronger. However, there will be little the RBA can do if the US$ is about to have a period of sustained weakness. Reports of further actions by China against Australian exports had no impact on the A$.

In short, some of the main risks we saw right up until late October have reduced now with the US elections almost resolved, and the vaccine program well advanced.  It is important to remember, as always, that volatility is an ever-present feature of equity investments.  But if your investment purpose and objectives are clear and your strategies are appropriately set, then this volatility can be viewed as your opportunity to earn decent returns on your money.  This applies equally whether you’re retired or still working and accumulating wealth.

Sources: Thomson Reuters, Bloomberg, RBA, Quilla Consulting..