November Monthly Market Update
As at end of November 2020
The benchmark MSCI World Index (NZD) rallied strongly, rising 6.1% over the month. Measured in their own local currencies however, the Index’s major constituent markets delivered even stronger returns. The S&P 500 Index rose 10.9%, the Japanese Nikkei 225 Index soared 15.1%, while in Europe the STOXX 50 Index posted a massive 18.1% return. The riskon sentiment which swept around the world also caused the more economically sensitive currencies like the NZ dollar to rise. Consequently these big returns, when translated back into NZD, were significantly diluted.
vaccine news from Pfizer and Moderna got markets excited early in the month. Optimism was also buoyed by more clarity over the US election. A Biden win is likely to mean no more tariff wars and greater stability in global relations. The nomination of former Federal Reserve Chair Janet Yellen for Treasury Secretary was also positively received by investors. This improving news has been a catalyst for widespread rotation out of defensive and growth stocks into cyclical and value. Some of the best examples of these latter companies exist in Asia and Europe, which has led many fund managers to begin reducing their long-held US overweight in favour of these markets.
Economic news out of China continues to confirm they are leading the world out of the current recession. The widely followed Caixin China PMI for November rose 1.3 points to 54.9, the highest it has been since December 2010. Impressively, China appears on track to capture at least a third of global growth in 2021.
NEW ZEALAND MARKET
Share markets at home and abroad had a remarkable November, with the S&P/NZX 50 Index returning 5.7% for the month. However, this was eclipsed by global peers, many of which were up double digits on positive vaccine-related news. The news was a strong tailwind for travel and tourism companies like Air New Zealand (+28.2%), Tourism Holdings (+15.2%) and Auckland International Airport (+11.1%). Fortunes were reversed for lockdown beneficiaries such as Pushpay Holdings, which helps churches collect cashless donations and host live-streaming services. Pushpay has been one of the top performing companies this year, but was the worst performer in November (-22.2%).
Seven companies in the Index returned more than 15% for the month: Fletcher Building, Meridian Energy, ANZ, Vista, and Mainfreight rounding out the list. Fletcher was the standout, returning 36.6% after reporting a better than expected start to the new financial year, noting a significant improvement in earnings. By contrast, lingering disruption impacts from Covid-19 continue to be seen across the agricultural sector with Scales (-3.8%), Fonterra (-4.6%) and Sanford (-8.1%) all near the tail end of the Index, and the latter cancelling its final dividend after a significant fall in profits.
One of the more salient features this month was a sudden flurry of executive turnover. In the space of a few weeks, there were CEO resignations at Summerset, Kathmandu and Sky TV; while Sky City Entertainment not only saw the CEO resign, but its CFO and CMO as well, with little information provided by the company regarding the departures.
Australian equities had their best month since 1988, with the benchmark S&P/ASX 200 Index posting a 10.2% return for November. The Energy and Financials sectors led the charge, returning 28.5% and 16.1% respectively, whilst defensive sectors (Staples, Utilities, and Healthcare) were the biggest laggards.
The upsurge in risk-on sentiment was most pronounced in companies highly sensitive to economic recovery. Examples included European mall owner Unibail-Rodamco-Westfield, which returned 73.1%; and travel agencies Webjet and Flight Centre, which returned 65.3% and 52% respectively. Unsurprisingly, the poorest performers were ‘risk-off’ Gold miners. Mid-tier producers Saracen, Silver Lake, and North Star returned -16.5%, -16.1%, and -15.1% respectively, magnifying a 5.4% decline in the USD Gold price.
Better than expected macroeconomic releases during November on employment, retail sales, building approvals, and the trade balance indicated a strong bounce-back in activity. This was confirmed by the release of the September quarter 3.3% GDP print in early December. Despite Australia’s rapid exit from a technical recession, the RBA stepped-up accommodative monetary policy. At its November meeting, the central bank cut its benchmark rate from 0.25% to 0.10% and committed $100b to purchase 5 and 10 year government bonds over the next six months.
Despite this easing, the Australian dollar rose strongly against major peers this month, benefiting from a trio of risk-on, weak US dollar, and strong Iron Ore thematics. The buoyancy even prevailed over a further souring of Sino-Australian relations, which culminated in China imposing punitive tariffs on Australian wine toward the end of the month.
Negative OCR now a possibility rather than a probability
It was a tumultuous month for fixed interest markets with multiple market-moving events. The closer than expected US election was the initial focus, but this was overshadowed by the release of very positive data from several phase 3 trials of Covid-19 vaccines. There is now light at the end of the tunnel, and 2021 may well be the year of the vaccine. Unfortunately, many countries around the world (particularly in the Northern hemisphere) are being hit with new waves of infection and associated restrictions. We expect global economic data to worsen over the next few months, which will keep central banks in a stimulatory mode.
New Zealand and Australia have so far avoided nationwide second waves of infection, and have managed to keep their economies mostly open. Economic activity on both sides of the Tasman has recovered faster than many had expected, forcing economists, treasurers, and central bankers to revise their forecasts upwards.
New Zealand is a case in point, with the RBNZ now less enthusiastic about introducing negative interest rates, an outcome which was seen as highly certain even a few weeks ago. The bank is also under political pressure, with the Finance Minister sending a letter to the RBNZ suggesting that stability of house prices be added to the bank’s remit. The RBNZ has been among the most aggressive of the central banks, sending NZ bond yields much lower than those in Australia or the US. That trend reversed in November, with the 10 year NZ government bond yield rising from 0.5% to 0.8%. This led to negative returns, particularly for long duration bonds. The S&P/ NZX Government Bond Index fell 1.8% for the month, and the S&P/NZX Investment Grade Corporate Bond Index was down by 0.9%.