October Monthly Market Update
As at end October 2020
Blue Wave Wipes Out
The benchmark MSCI World Index (NZD) fell 3.1% over October - its steepest decline since the March meltdown. This weakness was primarily due to new lockdown measures in Europe and no stimulus bill being agreed on in the US. A sharp rise in new coronavirus cases in the US (topping the daily record of 89,000), coupled with election jitters also tested investors’ resilience.
At the time of writing, Democrat presidential nominee Joe Biden had gained sufficient electoral votes to become the next US president, although this will not be confirmed officially for some time as vote counting continues. Pre-election polling correctly predicted his election, however on almost every other forecast, polls were wide of the mark. The ‘blue wave’ Democrat sweep of the House and Senate did not eventuate, in fact the Republicans not only held the Senate, but also reduced the Democrat majority in the House. This was a clear message to the Democrats that voters have no appetite for a shift further to the left on the political spectrum. This will likely mean tax hikes will be delayed and fiscal stimulus plans significantly scaled back.
In Europe, the run of very good economic data may be coming to an end. While Q3 GDP growth numbers were impressive, a widely followed leading indicator of economic confidence softened in October. This was followed by ECB president Ms. Lagarde stating that the Eurozone was losing momentum more rapidly than expected, and that risks were now tilted to the downside. The weaker outlook, along with a return to lockdowns in many member countries will likely prompt Brussels to accelerate deployment of the recently agreed €750b stimulus package.
NEW ZEALAND MARKET
Are you not entertained?
October was another volatile month, seeing the S&P/ NZX50 Index up as much as 6.8% early on, before pulling back to end on a +2.9% return. This was still well above most global peers.
The winner of New Zealand’s national election may not have been a surprise; however, the margin of victory was historic, as Labour became the first party under the MMP system to win an outright majority of seats in parliament. This means the Ardern government will be free to implement its agenda, including a new top income tax rate of 39% for incomes of more than NZ$180,000.
It was a good month for aged care providers Summerset (SUM) and Oceania (OCA), which returned 15.7% and 18.4% respectively, with the latter being top performer in the Index after a positive update on trading volumes at its annual shareholders meeting. Mainfreight was another solid performer, returning 17.2% on an update highlighting big improvements in revenue and earnings over the past six months. New Index entrant Pacific Edge was also one of the top performers, returning 14.3%.
Even as COVID alert levels were de-escalating in Auckland and Melbourne, the spectre of past and potential future lockdowns still seemed to loom over entertainment stocks such as SKY City Entertainment (SKC, -6.1%), and Vista Group International (VGL, -8.5%).
Dead Set Spending
The benchmark S&P/ASX200 index returned 1.9% for the month, with IT and Financials the strongest sectors; and Industrials and Utilities the weakest.
Takeover bids drove the index’s top two performers. Coca Cola Amatil returned 30.8% on a bid from its bottler cousin Coca Cola Europe Partners; and fund services business Link returned 27.9% on a bid from private equity. The two worst performers both involved expectations levelling with reality. Biotech Mesoblast returned -39.8% after the US FDA unexpectedly lifted the approval bar for one of its key therapies. Travel agency Flight Centre returned -18.2% as the market digested implications of renewed lockdowns in Europe for the global travel industry.
October’s AGM season was more treat than trick this year, with a broad tone of cautious optimism around revenue recovery in several industries – notably retail. Bank reporting season also kicked off, with ANZ first off the rank. Whilst profits were hit by material items, provision build, and interest margin compression; there were positive indications in falling deferral numbers and increasing deposit buffers – both of which bode well against risk in ANZ’s book.
The macroeconomic highlight was Australia’s Federal budget, which contemplates four years of deficits totalling some A$480b, taking Commonwealth net debt to 43.8% of GDP. Key big-ticket items were a pull-forward of personal tax cuts, and a significant expansion of investment concessions to large businesses. Whilst the budget was aimed at giving some disposable income back to households and encouraging the corporate sector to invest, some criticism was directed at the lack of provisions to smooth out the ‘cliff’ as support measures rolled off.
RBA & RBNZ sing from same song sheet
Global bond markets had mixed returns in October, with different trends across regions and asset classes. The Bloomberg Barclays Global Aggregate (NZD) Index was flat, but within that we saw negative returns from US markets offsetting positive returns from European markets. There were slightly better returns from Corporate Bonds in most regions, including New Zealand and Australia. The S&P NZX Investment Grade Corporate Bond Index rose 0.2% compared to the S&P NZX Government Bond Index, which fell 0.2%.
Election month in New Zealand didn’t have much of an impact on financial markets, with the result largely matching expectations. There was no scheduled meeting for the RBNZ but we did have conference speeches from both Adrian Orr and his counterpart at the RBA, Phillip Lowe. What was apparent from listening to both speakers is the convergence of monetary policy settings and objectives. At the time of writing (early November), the RBA had just cut the cash rate to 0.1% and also introduced an A$100b asset purchasing program targeting longer dated government bonds (including those from state governments). If the RBNZ introduces its Funding for Lending Program (FLP) as expected, then the only real difference between the two banks will be the attitude towards negative cash rates. Both banks are heavily focussed on employment rather than inflation, and also are less concerned about the distributional impacts of low interest rates. The bias remains to do more rather than less.