Crispin Murray’s weekly Aussie equities outlook

Pendal's head of equities Crispin Murray

 

US election. Rates. Covid. China. Last week was busy one. Here’s what it means for ASX investors according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.

 

WE SUSPECT the removal of uncertainty would have prompted a relief rally regardless of the US election outcome.

But the market seemed especially positive at the prospect of divided government in the US — with a Democrat White House and Republican Senate limiting scope for dramatic policy changes such as higher corporate taxes.

Further monetary stimulus from the Reserve Bank of Australia and Bank of England also helped markets last week.

The S&P/ASX 300 gained 4.45% for the week, while the S&P 500 was up 7.43%.

A Republican Senate would mean smaller fiscal stimulus, reducing the chance of a strong rotation to value within the market. Growth stocks tended to outperform during the week.

US election

The likely outcome seems to be a Democrat in the White House, notwithstanding talk of legal challenges.

The “blue wave” did not emerge. The Democrats have done worse than expected in the House of Representative, losing nine seats so far. They should retain a (smaller) majority.

The Democrats also underperformed expectations in the Senate. Current projections suggest a 52-48 majority to the Republicans.

Georgia may not get to the 50 per cent threshold needed for one candidate, which means both seats go to a run-off election on January 5. This will become a major focal point of campaigning.

History indicates the side not in the White House tends to do better in a run-off. Republicans were already leading — and votes for the Libertarian candidate are likely to break their way — indicating they are more likely to win.

Questions remain about the current administration’s next steps. These include potential legal challenges before the Electoral College meets on December 14 and any other actions President Trump may take before he relinquishes the office next year.

These issues cannot be ignored, but we are mindful of checks and balances that may limit risk.

The prospect of divided government likely means lower stimulus, but also less chance for some of the more contentious policy changes such as higher taxes.

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Without the control of Congress Biden is likely to plump for a more centrist cabinet, potentially taking some of the more left-wing agenda off the table.

Biden has a strong relationship with Republican Senate Leader Mitch McConnell, which may be constructive for a degree of co-operation.

The main short-term issue is the reduced expectation of a fiscal package, with $US1.5 trillion to $US2 trillion now possible by the end of Q1 2021. There is potential for the Senate to get this done while Trump is still president if it’s a smaller number.

Covid outlook

Cases continue to deteriorate throughout Europe and the US. Increased positive test numbers indicate a continuing rise in momentum.

Total US hospitalisations are at 50,000 versus a previous peak of 60,000. They are now spread over a wider geography but there are no signs of strain on the system yet. This remains a key factor to watch with an additional 100 new hospitalisations per day.

The market seems to be taking a sanguine view of lockdowns at this point and appears to be looking through this wave of Covid due to:

– A better understanding of the virus
– Improved healthcare system preparation
– A view that lockdowns work within a reasonable time frame
– Policy ready to plug the economic gap
– Liquidity so prevalent any sell-off can be quickly supported
– We may be weeks away from a vaccine

There was news of a new COVID strain emerging in Denmark. This highlights one of the potential risks to vaccine effectiveness.

There were also positive signs for a new therapeutic – Humaningen’s anti-GM-SF antibody – which showed 37 per cent improvement in outcomes in a hospital study. The trial is expanding, with a potential filing for approval in Q1 2021.

Economic outlook

Backward-looking jobs data in the US is positive. There was another step up in total jobs in October, driven by a recovery in leisure, hospitality and retail.

Aggregate signals on ISM data paint a positive picture for industrial activity. Most countries are tending to the expanding/strengthening quadrant. Australia was particularly strong in this regard.

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Short-term retail survey data in the US was a bit weaker. This may be partly related to the election, but rising cases may be beginning to have some effect.

Last week’s Chinese plenum — a meeting of the Central Committee of China’s Communist Party — was broadly in line with expectations.

There was a focus on growing new industries, encouraging more self-sufficiency and more emphasis on consumers.

Markets

Last week there was a reversal of the previous week’s risk-off trade — equities, bonds, commodities and gold all rallied.

The USD weakened despite the issues in Europe. This is supportive for commodities, gold and risk markets generally.

Growth recouped all the under-performance in the week ahead of the election, on reduced fiscal hopes and lower bond yield.

The vaccine is the next hope for the value bounce. This will need to be compelling to drive a significant reversal.

More cases, lockdowns, less stimulus, and a slow vaccine roll-out all suggest rates stay lower for longer, reducing impetus for a strong near-term value rotation.

The market was supported by what’s starting to shape as a good US earnings season. Expectations have been soft and a stronger recovery in Q3 GDP has flowed through into corporate earnings.

Among S&P 500 companies, 86% beat their quarterly earnings estimates, versus a long-term average of 65%.

Australia had a strong week led by REITs, industrials, and discretionary stocks, while defensives lagged.

Our market got an additional kicker when the RBA cut rates 15bp to 0.1%. Perhaps more importantly the Reserve cut the target level for 3-year bonds, launching a $110 billion six-month Quantitative Easing program, reinforcing the message that rates will stay effectively at zero for three years.

The prospect of further trade friction with China remains a risk. There has been speculation of additional measures on some goods – for example low-grade iron ore.

At this point Beijing may be happy to keep additional threats in the conversation without acting on them. But this issue must be watched.

Several positives are lining up that can support the market into the year’s end. These include:

1. Supportive global markets
2. Fiscal stimulus from Budget flowing through
3. Melbourne re-opening, perhaps more quickly than hoped
4. Borders re-opening
5. Pent-up demand as Australians stay home for Christmas
6. More stimulus from the RBA
7. Cautious positioning from investors
8. Potential for mergers and acquisitions (M&A)

We have seen results from three of the banks in the past fortnight, and the outlook remains unconvincing.

Revenue trends remain challenged. Credit growth, while stabilising, is still low. Margins remain under pressure and any tangible benefit from cost-out is an FY22 story.

However, they remain propped up by the likelihood of lower bad and doubtful debts (BDDs), which supports the capital position and headline earnings, bolstering the dividend yield.

Without BDD deterioration it is hard to see the sector underperform materially. But neither is there much catalyst for outperformance.

 

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