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Equity markets had been in holding but have strongly rallied in November for good vaccine trial data. Both Moderna and Pfizer have announced that their vaccines were about 95% effective in preventing the coronavirus. The results came ahead of expectations and have resulted to fueled equity market rallies. These candidates are expected to be submitted to the US FDA for approval soon. The vaccines are expected to be available soon and 20 million people in the US are expected to be vaccinated before 2020 ends. Roughly 2 billion doses are expected to be produced in 2021.
The number of COVID-19 cases is rising in Europe and the US, resulting to shutdowns that will affect short-term growth but markets are willing to look through this. The Democratic candidate appears to have won US Presidential election but Republicans occupy about a dozen House seats and markets are concerned that the Senate is still in play with two run-off elections in Georgia on 5 January 2021. The RBA has lowered the cash rate target from 0.25% to 0.1% and may remain there for three years. There is also a $100 billion Quantitative Easing in the next six months.
Huge fiscal and monetary stimulus and statements by Central Banks show that low interest rates help lift all growth assets including shares. The prospect of an effective vaccine has boosted cyclical sectors such as energy, financials and travel stocks. There has been a rotation to cyclical or value stocks at the expense of technology stocks and it should be good for Australian equities relative to global ones given the proportion of cyclical stocks in the Australian market.
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Forecast during this time is difficult but Australia is seeing upgrades to company earnings and GDP growth estimates. According to JP Morgan, “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”.
National Australia Bank has lifted its forecast for 3rd quarter GDP growth to 4% up from a flat forecast in September. As the economy reopens, a rebound in consumer spending and lower unemployment rate were cited. Early in 2020, the housing market was thought to collapse and drag the economy. ANZ has replaced its 10% fall in home prices forecast to a 2% rise and 9% gain in 2021.
Apart from equity valuations of more than 20x price earnings, the big risk to markets are the two run-off elections in Georgia. If Biden is declared the winner and the Democrats win both seats, legislation could enact anything. Markets have reacted after the US election as there would likely be a divided government. The leader of the Senate Democrats said that we they win Georgia, they will change America. Both Republicans finished ahead in the recent election but there is no saying what will happen and markets would negatively react to a Democratic sweep.
Big bets are discourage before the two run-off elections even if markets and economies appear set for further gains after COVID-19. Many policy settings might be different under one party rule and bulls must be cautious.
The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional.
We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.
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