Here’s what’s influencing Australian equities this week according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.
Equity markets experienced strong gains last week as positive news on the Pfizer vaccine outweighed a continued surge in US Covid cases.
Real-time data indicates higher US case numbers are starting to have an economic impact. There is a risk this could accelerate.
Lead indicators point to a rapid increase in hospitalisations next week, which could lead to renewed lockdowns in the US.
At this point investors continue to focus on the vaccine and potential for policy support to offset the impact of lockdowns. The S&P/ASX 300 gained 3.6% and is now down only 1.43% year-to-date. The S&P 500 was up 2.21%.
There was a significant rotation from momentum to value last week.
Latest vaccine developments
Pfizer announced interim results of its vaccine trial which show an efficacy rate of 90%. This means the number of infections in the vaccine group was 90% different to the placebo group.
This is much better than expected and has material implications for the time it could take to effectively suppress the virus. A 75% efficacy rate could take 6-to-12 months to see suppression, while this could be cut to a couple of months with a 90% rate.
Questions remain. We do not know how it performs on more severe infections. We also don’t know how long the vaccination remains effective — although observations of the immune response suggest it should work for at least a year.
There is some concern about distribution given the vaccine needs to be kept cold. Pfizer plans to retain control of the distribution process. They will make and freeze the vaccine at -70 degrees Celsius and ship it in dry ice, keeping it stable for 15 days. Once at a destination it can be stored at 2-8 degrees, keeping it stable for five days.
This is a positive development. There are expectations the data could be ready for emergency FDA approval by the end of November.
Expect Moderna to report its trial interim results early this week. They have already said the threshold of infection numbers in their vaccine group has been met. Moderna’s vaccine could trigger a more durable immune response than Pfizer’s.
Covid outlook
The vaccine news was critical because it appears the US is facing a surge in hospitalisations and deaths.
Daily new cases rose 40% last week versus a 20% gain the previous week. Given a sharp drop in daily new cases in places like France, where lockdowns are in place, the US is now in line with the EU in these terms.
Total US patient count is now above the peak during the summer wave, although cases are more evenly distributed across the country this time. The test positivity rate has climbed above 10% for the first time since May.
There are reports of issues with testing capacity, which can lead to delays in turnaround time and an under-reporting of case numbers.
Hospitalisations typically lag case number trends by a week, suggesting we could see a surge in the next few days. Some 26 States are now at their highest levels of hospitalisations and 17 are at their peak level of Covid-related ICU patients. ICU capacity remains reasonable in most States. This must be watched in coming weeks.
Localised restrictions are in place in Chicago and in Utah. A number of States have reduced bar opening hours and the size of gatherings. Any signs of capacity strain are likely to trigger more restrictions.
There is concern about the potential impact of Thanksgiving-related travel.
With the rise in cases, the US is seeing early signs of activity slowing — notably in retail and preparedness to leave home. Company and retail surveys have ticked down in recent weeks, as have consumer sentiment indicators.
The impact of greater restrictions is a key risk. As it stands today, markets seem of the view that lockdowns can quickly control the spread and that policy measures and an imminent vaccine can smooth the economic impact.
Markets outlook
The vaccine announcement lifted equities last week alongside oil, iron ore and copper. Bonds and gold sold off.
The US equity market is now up just shy of 10% for the month and is looking over-bought on some measures.
There is potential for some volatility or a technical correction brought on by rising case numbers. Last week there was a strong rotation away from momentum to value – by some measures the biggest ever intra-day move in that regard.
The Australian market is almost back to flat for 2020. We remain positive on the domestic outlook, given the combination of stimulus and border re-opening.
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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.
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.
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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Here’s the bond market outlook from Pendal portfolio manager Tim Hext ahead of this week’s interest rate decision and US election. Reported by portfolio specialist Dale Pereira
It’s all about this week.
Quantitative Easing and Blue Waves. Two expressions seldom mentioned — let alone together in a sentence. But Tuesday and Wednesday all will be revealed.
The RBA has been talking about rate cuts and likely Quantitative Easing (QE) for several months. Now it’s delivery time.
Yield Curve control, cash rates to 0.1% and Exchange Settlement to 0.01% look likely. QE of $100 billion in bonds and semis out to 10 years also seem likely.
Soon after polls will open in the US. By lunchtime Wednesday in Australia results will be flooding in.
The presidential race is critical and the US Senate may be on a knife’s edge.
A Joe Biden victory will mean massive stimulus with a Democrat Senate but major blocking if the Republicans hold it.
A Donald Trump victory would likely pave the way for decent stimulus because both a Democrat and Republican Senate would likely support it.
With new waves of Covid in Europe and the US, there is little doubt that extra fiscal and potentially monetary stimulus is needed.
Markets are largely priced for it. Only a contested election or a hostile senate can block it because both presidential candidates will want to start a term with a massive boost.
The balance of probabilities should be risk friendly, with only contested outcomes a landmine in waiting.
By Wednesday evening we should know where investment markets are headed for the next few months.
As always markets will move fast and we have our plans in place to adjust positioning for the outcomes. We want to make sure we are proactive — not reactive — to the news, a mistake many made in 2016.
Even as the US election result eventually becomes yesterday’s news, whoever is in power will face the tough task of rebuilding the US economy.
There may be some very short-term wobbles, but bonds should still perform. The main data point in Australia last week was the September quarter CPI.
A childcare-led bounce-back from the June quarter meant a 1.6% headline number or 0.7% Yearly. Underlying was 0.4% or 1.2% yearly.
All in all inflation has held in well this year. Goods prices are going up while services flat line — the reversal of a near 30-year trend.
While Covid is partly behind this — and it’s too early to call a trend — we will be keeping a close eye on how this unfolds in the quarters ahead.
Massive fiscal stimulus and the re-emergence of demand and supply could see prices tick higher in 2021 — a welcome development for the RBA but not the current market view.
And did we mention the Melbourne Cup? Avilius at $40 is a good outsider but this does not constitute a trade recommendation.
Tim Hext is a portfolio manager with Pendal’s Bond, Income and Defensive Strategies team.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Find out more about our investment capabilities: https://www.pendalgroup.com/about/investment-capabilities
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It’s a busy week. Here are the key factors ASX investors need to look out for, according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.
LAST week was eventful and this week promises to be the same.
The surge in new US and European Covid cases led to the start of lockdowns in Europe. In the US we also saw speculation that the election may be tighter than people expected a few weeks ago, while results season has been a touch disappointing.
Meanwhile Pfizer announced that the interim results of its vaccine trial would be delayed.
Domestically, the Queensland government announced its intention to maintain restrictions on travellers from Sydney.
The upshot was softer markets. The S&P/ASX 300 fell 3.87%, while US equities were off 5.62% (S&P 500).
The next few weeks will be important in terms of overall market performance and whether we see a rotation to value within equities.
The key issues:
• Will rising Covid cases stress healthcare systems in Europe and US?
• The degree to which containment measures drag on these economies
• The outcome – and timing – of the US election results
• The timing of relaxed interstate restrictions in Australia
• Any meaningful initiatives from the Chinese 5th plenum
Covid outlook
There was a clear deterioration in new case trends last week, driven by a surge in Europe which is now running at double the daily new case load of the US.
Governments have imposed lock-downs. The most draconian measures are in France and the UK. Without new measures modelling in the UK and France signalled that the number of deaths was set to exceed previous peaks.
The rationale seems to be that sharp lockdown now – before pressure builds in hospitals and colder weather arrives – may mean restrictions can be eased before Christmas.
One key difference this time around is that schools will remain open. The hospitalisation rate remains manageable in the US.
This will be the critical issue to watch in Europe, with the swift rise in cases and onset of colder weather two key risk factors.
Hospitalisation rates in France are showing some signs of a plateau, although it is too early to call. This will be a significant test of whether new therapies and treatments, improved protocols and better protection of vulnerable people leads to a more manageable health outcome.
An absence of community support for lockdowns is evident with substantial backlashes in the UK and Italy.
There is a glimmer of hope. Case numbers appear to be falling in some of the worst-affected countries such as Czech Republic and Switzerland, albeit from very high levels. But the outlook for Europe is concerning, given the rapid spread of the virus.
Pfizer did not provide interim results for its vaccine trial. There were too few cases to report statistically significant results. The trial is ongoing.
US Election outlook
This remains a key factor in near-term market performance, as well as the potential to trigger a rotation to value within equities. There is a strong view that a Democrat clean sweep would see outperformance from the value names, given the scale of the fiscal package that would result.
There are estimates this could run to the tune of US$2.5 trillion versus something in the order of US$1 trillion under the Republicans.
There are three issues to focus on:
The Result
At this point national polls place Biden’s lead at 8.0%, versus a 2.9% lead for Clinton in 2016.
Most polling experts put the probability of a Biden win at mid-80%. One exception is Plural Vote which has shifted from mid-70% to 62%. It is worth remembering that pollsters adjusted their methods after 2016. The chance that they have over-compensated and Biden does better than expected can’t be ruled out.
Betting odds are 65:35 to Biden. There is little evidence of a strong late movement to Trump. But there are wildcards which mean the result is not a foregone conclusion:
• Scale of turnout may be a factor. Turnout was 55.5% in 2016. The last time 60% turned out was in 1968, and there has not been a 65% turnout since 1908. There are potentially 20 million additional votes to be cast over 2016.
• There are some signs that Republican pre-voting is higher than expected. There are also signs of movement in expectations in key swing states. For example Trump is closing the gap in Florida and Iowa, while Arizona may be closer to swinging Trump’s way. These must-win states for Trump would get him to 244 Electoral College votes, 26 short of the 270 needed. He would still need North Carolina and Pennsylvania to swing his way, or one of those plus Wisconsin or Michigan
• Pennsylvania remains critical for Trump’s chances. Despite a huge campaign focus he is still behind by a wide margin. In 2016 the polls here were wrong by 2.6%. This time he needs an error of 4.2%
Timing
The situation is complicated due to the scale of pre-voting and the fact that different States count these in different ways.
Results in key southern states such as Florida will likely be known earlier, while northern states (where there is less pre-counting) will come later. Pennsylvania could take a week. If it is a close result we could be in for a long wait, with both sides heavily lawyered up.
Super-forecasters have a 31% probability of the result being known by November 8 and 47% by November 26.
The Senate
The Senate will be major factor for potential fiscal stimulus size and the degree to which Biden could enact his policies.
The race has become tighter, with a Democrat senate now at 55% probability.
The close States to watch are Georgia, South & North Carolina, Iowa and Arizona. In Iowa and Arizona polls are now moving the Republican way in the Presidential race, which suggests the prospect of a 50/50 or 49 Dem / 51 Rep Senate is now possible.
On election day Virginia could be a bellwether. It should be a comfortable Democrat win, but can provide early sign of turn-out levels and a possible signal for trends in North Carolina – a key swing state for the Republicans.
Economic outlook
Australian monthly credit data was in line with expectations at +0.1% month-on-month and +2.0% year-on-year.
This was the first increase in five months. Mortgage credit grew 0.4% month-on-month. This was the highest level since August 2018, highlighting better performance in the housing sector.
Owner-occupier credit was up 0.5% m/m (+5.4% y/y) and investor loans were up 0.1% m/m (-0.4% y/y).
Globally, European economic trends are softening as Covid cases rise, but we are seeing policy easing. Asia and the US continue to hold up well, while globally capex is generally doing better than expected.
Global Q3 GDP played out better than anyone hoped, but Q4 is now seeing downgrades.
We continue to remain relatively confident in economic recovery despite Covid’s resurgence, driven partly by the previous stimulus which has helped build a buffer supporting growth.
US personal income levels have dropped as support packages have rolled off, but still remains higher than at the start of the crisis.
The jobs recovery is holding income levels at reasonable levels despite a lack of stimulus. Savings rates remain elevated providing a buffer for the consumer. This is also the case in Australia.
The latest Covid surge does not appear to be affecting activity levels in the US. But it’s clearly starting to have an impact on European activity according to the latest mobility data.
The challenge here is that the policy response in Europe is complicated due to ECB limitations on funding to countries to provide additional stimulus.
There is a clear risk that European economic signals will deteriorate meaningfully in the next few weeks.
News out of China’s plenum will be important this week. Currently Chinese economic indicators continue to go reasonably well.
Markets outlook
The key issue is how the combination of the pandemic, US election and policy responses will impact on the potential for rotation in the market.
We are at historical extremes when it comes to the outperformance of growth over value and also on the latter’s valuation premium. A relatively benign outcome and removal of uncertainty could trigger a rotation to underperforming value stocks.
In terms of performance last week was a big risk-off week – with nothing other than bitcoin working.
There were several concerns (detailed above) but the fact that gold also underperformed suggests the market is cutting positions and awaiting outcomes in key issues over the next few weeks.
US results season kicked off with big tech broadly in line with high expectations, but subsequently selling off.
So far we have seen materials and industrial earnings perform best versus expectations.
Last week Australian sectors were down across the board. Staples fell only 0.15% while Energy shed 6.71% as a proxy for global growth sentiment.
We saw domestic industrials affected by a further delay in re-opening borders. But we believe this will be short-lived and an opportunity to add to positions.
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BT Balanced Returns PST (ABN: 90 492 550 926) Termination
The BT Balanced Returns PST (ABN: 90 492 550 926) (PST) will be terminated on 29 January 2021.
Since the BT Balanced Returns PST was closed to new investors in 2012, there has been decreased demand from investors for the fund. In a recent review, the Trustee1 noted that the fund’s small number of investors and low funds under management means it is becoming less viable and, as a result, a decision has been made that it is in the best interests of investors for the fund to be terminated.
What does this mean for investors?
From 29 October 2020 any request for an application or withdrawal from the Balanced Returns PST will be assessed by the Trustee on a case by case basis and will depend on whether the price would be fair and reasonable for unit holders. If this cannot be satisfied, then the Trustee of the PST may not be able to process your request. If you have arranged regular scheduled contributions to be made into your investment, they may be returned to you.
Payment of the proceeds of your investment holding will be made by the end of February 2021 and credited to the nominated bank account we have on file for your superannuation account. A separate notice confirming this payment will be sent to the registered unit holder.
A small proportion of your holdings may be withheld to meet outstanding tax payments. If there are residual amounts owed to you after any outstanding taxes are paid, we expect to pay these to you by October 2021.
We understand that this is an important change and encourage you to seek independent financial advice from your financial adviser and specific tax advice from a registered tax agent.
What do investors need to do?
To ensure that the proceeds of your investment are credited to your preferred bank account, and that you don’t miss out on important communications about your investment(s), please contact us if your bank account or mailing details have changed. To do this, you can write to us at the following address:
BT for Pendal Fund Services Limited
Attn: Corporate Accounts Team
GPO Box 2675
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Your letter should include the following details:
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− Your investment name: BT Balanced Returns
− What you would like to change e.g. your address or bank details
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Here are the key factors influencing Aussie stocks this week, according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.
The ASX has remained largely resilient despite a second wave of Covid-19 in the US and Europe and a lack of tangible progress on a US fiscal package.
The S&P/ASX 300 fell 0.22% last week. In the US the S&P 500 was off 0.51%.
We continue to see some rotation in favour of value and cyclicals — probably helped by expectations that a Democrat sweep in November’s election will lead to larger fiscal stimulus.
This has also encouraged US bond yields to break higher.
Key near-term risks include a challenged election result in the US and the potential for rising cases and hospitalisations in Europe leading to greater lockdowns.
On the plus side, the potential removal of election uncertainty and the scope for more stimulus remains supportive for markets. New data from vaccine tests is likely to be available this week.
Covid update
Case numbers are climbing in the US and Europe, the latter driven by a surge in France. US hospitalisations are up by a third from recent lows, while in France the rate is half that of the previous high.
The key factor to watch is whether the increase in hospitalisations leads to more lockdowns. This is a greater risk in Europe than the US, where hospital capacity does not appear under pressure.
There is also scope for further policy support in Europe, via an extended asset-buying program from the ECB and a credit-funding program.
There could be significant newsflow on a vaccine this week with Pfizer due to report interim indications.
The consensus expectation is for a vaccine success rate of 70-75%. Anything better would make a material difference in the appeal and the time it takes to contain the spread of the virus.
Economic outlook
The US economy continues to hold up well despite the second wave of cases, uncertainty around the election and the lack of a fiscal package.
Housing remains a strong factor. House prices in the US are rising materially, driven by cyclical and structural factors.
In combination with a rally in equities, this has led to new highs for consumer net worth, which is likely to support further consumer spending.
Central bank stimulus remains substantial, continuing to rise last week. M2 money supply is now up 24% year-to-date.
Europe is more of a concern. There are signals that the rising numbers of cases is having an impact on activity. PMIs in the Eurozone and the UK have rolled over in October.
Election outlook
With a week to go the presidential race has not seen any significant shift in betting odds or polls.
There are some signs the senate race may be a bit closer than previously thought. This increases the likelihood of a large fiscal stimulus, which has been driving the rotation to value and cyclicals in recent weeks.
Market outlook
Expectations of a fiscal splurge after a Democrat win have encouraged bond yields to continue creeping higher. They have broken through recent resistance levels and the curve has steepened.
A steeper yield curve and higher bond yields are positive for financials, which performed better this last week.
The Australian market largely held onto its month-to-date gains. Banks continue to bounce back, mainly driven by investors closing down underweights.
Banks were up 1.2% for the week and 11.2% for the month compared to a 6% gain for the S&P/ASX 300.
Trading updates from AGM season, coupled with loosening domestic restrictions, were generally supportive for some of the more cyclical parts of the market.
Defensive stocks generally underperformed as people rotated into banks and cyclicals.
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Here’s the bond market outlook from Pendal portfolio manager Tim Hext ahead of next week’s interest rate decision. Reported by portfolio specialist Dale Pereira
It’s been an eventful time in the bond market as Australians prepare for Tuesday November 3 – not the Melbourne Cup or the US election, but the RBA statement.
Since early September the RBA has been dropping hints about further easing and the market is now largely priced.
We managed to pick up on the hints and have been well placed for the moves.
A cash rate cut to 0.10% and 3-year Yield Curve Control to 0.10% seem certain. The ES account interest rate (RBA interest on surplus balances) will likely go to 0.01%.
This last one is important because it becomes the effective cash rate as the RBA has left huge surplus balances in the market.
This may see some cash products tip into negative rates. The RBA was keen to avoid this earlier in the year but seems comfortable with it now.
Quantitative Easing
Quantitative Easing (QE) is also likely.
The market expects the RBA to announce a program of some $100 billion of bond buying over the next year.
This will likely be outstandings weighted, meaning about $65 billion in government bonds and $35 billion in semi-government bonds.
This will account for about a quarter of government new issuance and almost half state government new issuance.
This last one is important — Governor Lowe has been very vocal about states needing to collectively spend an extra $50 billion to help the recovery. It might seem rude to urge this and not assist.
Markets are now trading Australian 10-year bonds at flat to US 10-year bonds after an average of 25 basis points over the last six months.
Importantly, the expectation of easing has seen a weaker Australian dollar.
In a recent speech Governor Lowe was explicit in his concerns that higher rates here would make the currency stronger — an outcome no country wants during a recovery.
This shows international factors have a huge impact on our monetary policy.
So come Tuesday November 3, markets expect a rate cut and QE.
Two undecided factors are the interest the RBA will offer on ES Balances and how much and what for QE.
For bond managers like us, how far out the bond curve they buy will be vital for relative value and what we hold.
Modern Monetary Theory
We keep getting asked: “is this Modern Monetary Theory?”
Technically no, but effectively yes.
MMT urges money financing — the RBA printing money and giving it to the government. QE involves the government issuing bonds to the market and the RBA then buying some of them from the market.
The RBA thinks this is a vital distinction, but a casual observer might call it a nuance.
Tim Hext is a portfolio manager with Pendal’s Bond, Income and Defensive Strategies team.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Find out more about our investment capabilities: https://www.pendalgroup.com/about/investment-capabilities
Contact a Pendal key account manager:
https://www.pendalgroup.com/about/our-people/sales-team/
Here are the key factors influencing Aussie stocks this week, according to Pendal’s head of equities Crispin Murray (pictured above). Reported by research analyst Lee Ma.
AUSTRALIAN equities have continued to perform well despite rising Covid cases overseas.
In three weeks we could know the result of the US election and have positive vaccine data. This has kept investor sentiment buoyant.
The S&P/ASX 300 Accumulation Index lifted 1.2% last week and made further gains on Monday.
Growing confidence on the election outcome and the likelihood of a January stimulus package up to US$3 trillion (in case of a Democrat sweep) sparked predictions for a value resurgence.
Banks (+2.8%) did well over the week as a result, though they were still down 16% this year (versus -5% for the market).
Covid outlook
Case trends are deteriorating in the US and Europe. Some European countries such as France are clearly in worse shape. This is leading to the reinstatement of partial lockdowns which raises concerns over economic growth.
On a 7-day rolling average, France’s daily new confirmed case number has exceeded 300 cases per million people, overtaking the UK (about 250) and the US (175). The US was at 200 on its worst days in July.
The positive test ratio remains meaningfully lower than the first wave, which means there was likely substantial under-reporting of cases back then.
More importantly, we have seen an uptick in hospitalisations in the US and Europe. While death stats are still trending sideways, hospitalisation is something we watch closely.
On the vaccine front, we are getting close to the first Phase 3 vaccine data. There was bad news as Johnson & Johnson paused its trial without a clear explanation. This is another adenovirus-based vaccine like AstraZeneca’s which also had safety concerns in its phase three trial.
But it’s perhaps more important that the window for something to go wrong with the mRNA vaccines (Pfizer/Biotech and Moderna) is closing.
It has been four weeks since AZ had issues. The trials would have seen thousands get their second booster shots, so from a health perspective nothing serious appears to have emerged.
The market will closely watch the vaccine’s efficacy. We may get close to having statistically significant data by the end of the month, given the current number of Covid cases.
The vaccine will probably not be ready for FDA approval at that point, but it will be reported, given its materiality.
Economic data and policy outlook
Domestically, we had significant news with RBA Governor Phillip Lowe announcing a shift in the RBA’s policy framework, similar to the Fed’s recent communication.
This was not completely unexpected given the state of global central bank thinking.
The key points were that inflation has proven stubbornly low in Australia and globally, requiring central banks to be less cautious on pre-empting inflation.
The RBA does not expect to increase the cash rate for at least three years. The governor spoke to other easing measures which may be needed given the level of stimulus seen in other countries.
He noted how “high” Australian 10-year bonds were compared to the rest of the world. This may lead to the RBA extending out its bond-buying or yield-targeting.
Philosophically he noted the RBA’s three objectives were price stability, full employment and the economic welfare of Australians. Stopping structural unemployment was better for financial stability.
He also made note of Australia’s high level of savings which reflects uncertainty and unease. The RBA will need to help them get over the fear hump eventually.
While none of this messaging is new, the way it was delivered in our view reinforces a core premise that policy makers are aggressively supporting growth, which is upbeat for markets.
The Australian economy has the potential to surprise to the upside in growth terms next year if it can steer clear of lockdowns.
In the US data remains good, though it may be slowing down slightly. Retail sales (ex-auto) accelerated to 10% over the month (annualised) from 8%.
The other surprising data is the surging number of new businesses, which almost doubled to 1566 for the third quarter as people who lost their jobs set up on their own. This is reflected in a sharp rebound in small business confidence.
State Tax Revenues have recovered on the back of good retail sales and a strong property market. This is important because it reduces the need for further layoffs, and might spur further spending on the infrastructure side.
Markets outlook
The governor’s comments exerted a strong influence on our markets last week, leading to a lower 10-year bond yield (0.72% vs 0.80% a week ago) and a weaker Australian dollar (down 2% to 0.7081 AUD/USD).
It was also supportive of the equities market.
Overseas, market performance continued to be somewhat benign on the back of rising Covid cases. Our proxy for value v growth (Russell 3000 v NASDAQ) keeps bouncing off its lows, but was unable to make a break last week.
Banks led the market domestically last week on the back of the latest government budget and dampened concerns on BDDs from the RBA’s comments.
Resources softened (-0.5%), which coincided with some weaknesses in the iron ore price (-2%).
As people close up their banks underweight, it is likely Resources have been used as a funding source.
Other domestic cyclicals continue to do well, and as do growth names in general.
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EMERGING markets investors must have a strong understanding of country-level factors. Global Emerging Markets Opportunities portfolio managers James Syme and Paul Wimborne (pictured above) explain their approach using Thailand as an example.
Emerging markets go right or wrong at country level, but there are some similarities between economies and markets within particular regions.
Examples include the commodity dependencies of Latin America and the Arab Gulf or the euro-linkage of Central Europe.
One of these similarities is the relative stability of the four South-east Asian markets — Thailand, Indonesia, Malaysia and Philippines — since a period of extreme economic and political volatility from 1996 to 2006.
That stability has been weakened by the economic and social effects of coronavirus, notably in Thailand.
Thai politics have been deteriorating since the mid-2000s due to broad tensions between a reform-oriented, largely provincial political movement and a conservative, largely Bangkok-based elite with strong links to the royal family and the military.
This second group has been in power under the military-backed government of former army chief Prayut Chan-o-cha since the 2014 coup.
This year Thailand has experienced an upsurge in anti-establishment protests that began in February when the Election Commission banned the progressive Future Forward Party.
Covid-related lockdowns led to a period of calm, but protests have picked up again in recent months.
Protestors are demanding the government’s resignation, the dissolution of parliament and fresh elections under a new constitution. Demands also include a reduction in the monarch’s roles in government and the military. This is intensely controversial for the royalist elite and may prove a particular source of tension.
The government seems unwilling at the time of writing to engage with protestors. Instead, it is again relying on technocratic delivery of a strong economy to mollify popular unhappiness.
With policy makers expressing concern about the 2021 tourist season, the ministry of finance (and its new head, Arkom Termpittayapaisith, appointed as Finance Minister on October 5) is turning to fiscal stimulus to support the economy.
One of the key measures is a consumption support scheme for the fourth quarter of 2020. This is modelled on the “Shop for the Nation” scheme deployed in 2019 but at a larger scale, allowing up to THB 30k (around US$1000) of consumer spending per citizen to be tax deductible from income taxes.
Finance minister Arkom previously worked in the transport ministry, where he played a key role in several major transport infrastructure projects. Commentators assume he has been picked for the finance ministry to push more of these kinds of projects through with the aim of further supporting economic growth.
The twin policies of running a large current account surplus and accumulating foreign exchange reserves has been a consistent feature of economic policy in Thailand since 2006.
This requires the management of exchange rates to prevent the Thai baht strengthening against the currencies of trading partners. This policy looks to be continuing.
Thai foreign exchange reserves are up 10% to US$238 billion this year. This policy, combined with the economic impact of Covid-19, means monetary policy has had to be kept loose.
The Bank of Thailand’s policy interest rate, the one-day repurchase rate, remains on hold at a record low of 0.5%.
The monetary policy committee is reported to be considering unconventional monetary policy measures such as quantitative easing or negative policy rates.
If fiscal policy (described by the central bank as “the main driving force behind economic recovery”) is not sufficiently stimulative — and with policy rates near the zero lower-bound — unconventional policies may be seen in Thailand.
Ultimately the “fortress balance sheet” approach to foreign exchange reserves offers economic stability and security.
But it’s dependent on a model of under-consumption and some degree of financial repression of people who are both workers and consumers.
This can minimise financial market concerns about political unrest, and may once again allow the government to face down its critics.
With tourism yet to show signs of recovery, we remain zero-weight Thailand and prefer to look for recoveries in the more domestically-driven part of the emerging market equity asset class.
James Syme and Paul Wimborne are senior fund managers and co-managers of Pendal’s Global Emerging Markets Opportunities fund.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Find out more about our investment capabilities: https://www.pendalgroup.com/about/investment-capabilities
Contact a Pendal key account manager: https://www.pendalgroup.com/about/our-people/sales-team/
RESPONSIBLE investment leader Regnan has been appointed to the Future-Fit Development Council, a network of companies and investors working to establish a global business benchmark for sustainability.
UK-based Future-Fit has developed a free self-assessment tool – the Future-Fit Business Benchmark – which any business can use to report its contribution to real-world progress in environmental and social issues.
Regnan will help Future-Fit accelerate its work with the global investment community.
“Regnan is well recognised for its rigour in analysing the impact of sustainability issues on companies,” said Regnan’s head of advisory Susheela Peres da Costa (pictured above).
“We are delighted to have found in Future-Fit a partner committed to advancing an equally systematic approach to the impact companies have beyond their boundaries.”
Regnan works to improve sustainable performance by addressing Environmental, Social and Governance (ESG) issues.
The advisory — which is part of Pendal Group — recently appointed a London-based impact investment team to launch the Regnan Global Equity Impact Solutions strategy in late 2020.
The future of ESG integration and engagement
Future-Fit co-founder Martin Rich said he was “delighted to embark on this partnership with Regnan, a true global leader in the responsible investment market.
“Regnan’s commitment to embed the Future-Fit Business Benchmark into the heart of the new Global Equity Impact fund is incredibly powerful in showing how investors can take a holistic approach to evaluating and encouraging responsible and sustainable business.”
The Future-Fit Business Benchmark translates systems science into practical, free-to-use tools designed to help business leaders, investors and policy makers respond effectively to the world’s biggest challenges.
Future-Fit’s members work closely to stress-test and co-evolve the benchmark to be as useful and usable as possible for businesses of any size and sector.
The UK-based charity’s mission is to establish “a society that protects the possibility that humans and other life can flourish on Earth forever”.
Find out more about Future-Fit here.
Regnan is a global leader in long-term value, systemic risk analysis and responsible investment advice.
Last year Regnan appointed a London-based impact investment team to launch a Global Equity Impact strategy in late 2020.
Regnan recently co-authored a paper with the Principles for Responsible Investment, Active Ownership 2.0, which sets a new benchmark for responsible stewardship. Regnan is wholly owned by Pendal Group.