National Australia Bank has just
lifted its forecast for 3rd quarter
GDP growth to 4%, up from a flat
forecast in September.
However, the Republicans look to
have picked up around a dozen
House seats. Of concern to
markets though is that the Senate
is still in play with two run-off
elections in the state of Georgia
on January 5, 2021.
Also, the RBA lowered its cash
rate target to 0.1% from 0.25%
and said it would remain there for
three years. It also announced
$100 billion of Quantitative Easing
over the next six months.
MARKETS RALLY ON POSITIVE VACCINE NEWS
S U M M E R 2 0 2 0
OUTLOOK AND MARKETS
Massive fiscal and monetary
stimulus as well as statements by
Central Banks (US Fed and RBA for
example), that interest rates will
stay low for several years has
helped lift all growth assets
including shares.
The prospect of an effective
vaccine has provided an extra kick
to more cyclical sectors such as
financials, energy and travel
stocks. In fact, there has been a
big rotation to cyclical or value
stocks (or re-opening stocks) at
the expense of “safe” technology
stocks. This should be positive for
Australian equities relative to
global equities given the
proportion of cyclical stocks in our
market (banks, resources etc.).
Making forecasts in this
environment is very difficult.
However, what we are seeing in
Australia is upgrades to both
company earnings and to GDP
growth estimates. According to JP
Morgan (AFR, Nov 6) "If you look
at it on a one-month basis, every
single sector over the past month
has seen positive earnings
revisions, with the exception of
utilities. The number of
companies that are upgrading
[earnings] is pretty much at all-
time highs”.
It is not all good news though as
the number of COVID-19 cases
has been rising in Europe and the
US. The resultant shutdowns will
impact short-term growth but the
markets have so far been willing
to look through this as there is
now light at the end of the tunnel.
The other major development was
the US Presidential election which
appears to have been won by the
Democratic candidate.
Equity markets had been in a
holding pattern but have rallied
strongly in November on the back
of good vaccine trial data. Both
Pfizer and Moderna announced
that their vaccines were around
95% effective in preventing
COVID-19.
These results were well ahead of
expectations and have fuelled
equity market rallies.
The expectation is that these two
candidates will be submitted to
the US FDA for approval any day
now and approval will come
shortly thereafter. US Operation
Warp Speed will then kick in and
the vaccines should start being
available for use within 24 hours.
The expectation is that upwards of
twenty million people in the US
will be vaccinated before year end
and roughly two billion doses
(enough for one billion people)
should be produced by these two
firms in 2021, if both candidates
are approved.
A rebound in consumer spending
as the economy reopens and an
expected lower peak in the
unemployment rate were cited.
Earlier in the year it was thought
that the housing market would
collapse and drag down the
economy. ANZ has now replaced
its forecast of a 10% fall in home
prices in 2020, with a forecast 2%
rise, and a 9% gain in 2021.
The biggest risk to markets (apart
from equity valuations of over 20x
price earnings) are the two run-off
elections in the US state of
Georgia on January 5. If Biden is
declared the winner (on 14 Dec),
and the Democrats win both
seats, there will be no constraint
on what legislation they could
enact.
Markets have reacted well after
the US election because divided
government looked likely. As the
leader of the Senate Democrats
has said, “If we win Georgia, we
will change America”. Both
Republicans finished ahead in the
recent election, however anything
is possible and markets would
react very negatively to a
Democratic clean sweep.
