All things market related

 

By Shruti Yadav

 

The Australian Economy

Aggressive COVID-19 containment efforts appear to be paying off in Australia, particularly in the state of Victoria, which has recorded successive weeks of no new infections. Real-time mobility data suggest a gradual economic recovery taking hold, and consumer sentiment has reached its highest level since February 2020.

Consumer prices in Australia rose 1.6% in the quarter ended September 2020 compared with the June 2020 quarter, and by 0.7% compared with a year earlier.

The unemployment rate in Australia increased to 6.9% in September from 6.8% in August. We can expect a fluctuation in the unemployment rate in the months ahead as businesses reopen and more workers return to the workforce.

At Reserve Bank of Australia’s (RBA) November meeting, the Board discussed the updated forecasts. It concluded that, despite the somewhat better recent outcomes in Australia, the recovery was expected to be extended and bumpy. The outlook implied a large shortfall in activity and employment from levels that would be consistent with full employment. To further support the recovery and complement the significant support coming from fiscal policy, the Board decided to introduce a further package of measures:

  • a reduction in the cash rate target to 0.1 per cent;
  • a reduction in the interest rate on Exchange Settlement balances to zero;
  • a reduction in the target for the yield on the 3-year Australian Government bond to around 0.1 per cent;
  • a reduction in the interest rate on new drawings under the Term Funding Facility to 0.1 per cent; and
  • the purchase of $100 billion of government bonds of maturities of around 5 to 10 years over the next six months.

 

International Markets – Economic Conditions

Global economic activity has picked up from its April low and labour market conditions have generally improved as public health restrictions were eased across most economies. After the June quarter recorded the biggest contraction in global GDP since the Second World War, global GDP growth in the September quarter was the strongest since at least this period (Graph 1.1).

But the rebound in activity in the September quarter still left GDP well below pre-pandemic levels in the major economies, with China the notable exception. Goods consumption led the recovery, with retail sales above pre-pandemic levels in many economies. Global merchandise trade has bounced back quickly alongside the recovery in goods consumption, and new export orders suggest merchandise trade should continue to recover in coming months (Graph 1.2). In contrast, services trade has remained depressed due to most international travel continuing to be severely constrained.

The Housing Market

Australian home prices at present are being boosted by even lower interest rates, government home buyer incentives, income support measures and bank payment holidays. However high unemployment, a stop to immigration and weak rental markets will likely weigh on inner city areas and units in Melbourne and Sydney into next year. Outer suburbs, houses, smaller cities and regional areas are in much better shape.

 

 

Real estate agents also report a significant increase in interest from expatriates and foreign buyers looking for a relatively safe-haven to park cash.

 

Global Equities Market

After two months of consolidation, global equities powered ahead in November, reflecting positive COVID-19 vaccine news and a seemingly clear winner of the U.S. Presidential election. The gains came despite rising COVID-19 cases in both Europe and the United States and the re-imposition of some social distancing restrictions.

Reflecting the risk-on sentiment, the $US and gold prices retreated while oil prices strengthened. Overall global bond yields, however, remained subdued.

As seen in the chart set below, the rebound in global equities has reaffirmed the uptrend that has been evident since earlier this year. The trend in both bond yields and the $US remains downward, though both have broadly consolidated in recent months. Gold prices are still in an uptrend, through this appears at risk of breaking if much further price weakness develops. Oil prices, meanwhile, are trying to push higher following sharp declines earlier this year.

Value Investing trending up

Un-loved value parts of the global equity market – such as energy, financials and non-U.S. developed markets – broadly outperformed for the second month in a row, though unlike in the previous month, growth stocks also delivered reasonably good gains in November. By region, the U.S. and emerging markets retain the strongest performance trends, with the strongest sectors being technology and consumer discretionary and the strongest factors momentum, growth and quality.

As can be seen from the figure below, the Small Cap and Value stock returns over the past one month have been 14.3% and 17.4%, respectively.

 

 

References:

RBA: Statement on Monetary Policy – November 2020

Vanguard: Economic and market update – November 2020

AMP Capital: ECONOMICS & MARKETS – Market Update 27 November 2020

AFR: Why now may be a good time to invest in property

BetaShares: Market Trends: December 2020