Crispin Murray’s weekly outlook for Australian equities


Pendal’s head of equities Crispin Murray (pictured) outlines how the US experience with COVID-19 and the latest vaccine developments are impacting the outlook for Australian equities.


Quick take-outs

  • Despite negative sentiment from increased COVID-19 cases, equity markets continued to rise
  • Economic data has been supportive, but there are early signs of a slowing in the V bounce
  • We’ve seen some positive vaccine news flow
  • Locally it’s an important week for sentiment with the risk that stocks leveraged to economic recovery could be impacted by the Victorian lockdown

As bad as it feels with the negative news flow around rising COVID cases in Australia and parts of the US, the market hasn’t responded as some may have expected — and has continued to grind higher. We are now at a juncture where:

  • We could see a more significant leg down if case load data continues to worsen;
  • But if evidence emerges that virus management has improved, we could get squeezed higher — bearing in mind that overall market positioning has turned more defensive.

Our portfolios are positioned defensively — but not aggressively so. We have stated several times in this weekly Australian equities note that a balanced portfolio with a good mix of recession insurance and recovery plays is very important in this unpredictable and fast-moving environment.

US Economic data surprises to the upside — but there’s evidence of the V stalling and no improvement in US case numbers

Published economic data continues to be positive.

Jobs data is strong, which has supported the market. On the employment front “Hours Worked” (+8.3%) and “Household Employment” (+6.6%) surprised to the upside. Similarly, the PMI diffusion indices are heading in the right direction indicating a stronger growth momentum than many anticipated.

We are now looking at an 8% drop in US Q2 GDP versus an 11% to 12% drop — as most estimates suggested we were facing a few months back. Still a lot to make up, but significantly better. Clearly interest rates will continue to be supportive.

However there is still some evidence that things are slowing. Markets must gauge not only the economic effect of the lockdowns, but a perception of risk that is deterring consumer spending.

A recent University of Chicago study concluded that sentiment — rather than the lockdowns themselves — are the biggest headwind. We know that only around half of the stimulus has been spent so far. This is something to keep watching in the US and Australia.

There are signs of this slowdown coming through in the last week in the worst-affected states of Florida, Texas, California and Arizona — which make up about a quarter of the US population. Restaurant bookings in the Open Table app tapered off quite sharply last week after a post-lock-down recovery.

Cases in the US continue to rise and hospitalisations are increasing — though they remain below the previous peak and deaths are still low. In Florida overall numbers are worse, though there is less strain on hospitals. In contrast, Phoenix and Houston are close to ICU capacity. We are now seeing “surge plans” implemented in many of these cities such as LA, including the deferral of elective surgery.

The data shows some smaller US states have seen improvements — but not the major states such as Florida, Texas and California.

Vaccine news flow is positive

One positive consequence of rising cases is the acceleration of some Phase 3 trials. There is some talk of the first batches being available before year-end.

The three main trials are:

  1. Moderna
  2. Aztrazeneca (in partnership with the University of Oxford)
  3. Pfizer (four variants of a vaccine in development)

Pfizer has just released results of Phase 2 trials on one of its vaccines, which indicate a) the drug is safe to use and b) it is triggering an immune response. This means it can progress to the final Phase 3 trial, which will be 30,000 patients. The rate of new cases actually helps determine the efficacy of the vaccines.

In the best-case scenario, the drug will be approved by October. Pfizer estimates it could produce 1.2 billion doses in 2021, which would equate to 600 million treatments. This shows the problem likely will not be solved by a single vaccine. To meet demand we will likely need several vaccines to be approved.


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