Over the month of December, markets broadly achieved positive returns as vaccine roll-outs and another fiscal stimulus package in the US offset bad news on the virus front.
Restrictions tightened in many countries as new COVID-19 cases across the developed world surged, as a new more infectious COVID-19 strain began to spread globally. However, vaccination programs have given markets hope that economies will fully reopen over the next year.
Emerging markets enjoyed another strong month, returning 2.5% in unhedged terms, mainly driven by commodity exporters, such as Brazil and Russia, but also a strong rebound in India. Growth reverted back to outperforming value, mirroring the technology versus old economy narrative, which unfolded during the pandemic. Major political tail risks have receded for now with Brexit having been resolved in an orderly manner. However, the political situation within the US has recently been at the forefront of global news.
The US dollar (USD) weakened against currencies of major developed countries and plummeted against currencies of commodity exporters, as investors kept positioning for commodity reflation. Consequently, the Australian dollar (AUD) rose 4.7% relative to the USD over the month. Gold outperformed global equities due to worries about the debasement of currencies in a year where governments have monetised more debt than ever before.
Major central banks also reassured markets about their willingness to offer a backstop should any short term obstacles to the recovery begin to emerge. The US Federal Reserve committed to maintaining the pace of its asset purchase programs, while the European Central Bank increased its asset purchase program. China’s central bank implied a fair balance between slowing credit growth without tightening prematurely.
Overseas government bonds remained relatively flat as yields moved sideways for most developed nations, while the Bloomberg Ausbond Treasury Index returned -0.4%.
Australian shares were positive in December, with the S&P/ASX300 returning 1.3% and S&P/ASX Small Ordinaries returning 2.8%, as markets continued to price in the recovery, which drove up commodity prices. Materials (+8.8%) and IT (+8.6%) were the best performing sectors, while the weakest performing sectors were Utilities (-5.4%) and Healthcare (-4.7%).
- During its early December 2020 meeting, the Reserve Bank of Australia (RBA) decided to maintain its current policy settings, including the target cash rate at 0.10% per annum and the targeted yield on 3-year Australian Government bonds at 0.10%. Governor Philip Lowe noted that in Australia, the economic recovery is under way and recent data have generally been better than expected. This is good news, but the recovery is still expected to be uneven and drawn out, and it remains dependent on significant policy support. In the RBA’s central scenario, it will not be until the end of 2021 that the level of GDP reaches the level attained at the end of 2019. In the central scenario, GDP is expected to grow by around 5% in 2021 and 4% over 2022. The extended period of high unemployment and excess capacity is expected to result in subdued increases in wages and prices over coming years. In the September quarter, the Wage Price Index increased by just 0.1%, to be 1.4% higher over the year. In underlying terms, inflation is forecast to be 1.0% in 2021 and 1.5% in 2022.The Board has noted that it will not increase the cash rate until inflation sits sustainably within the 2-3% target range. For this to occur, wage growth will have to be materially higher than it is at present. This will require significant gains in employment and a return to a tight labour market.
- Australian seasonally adjusted employment increased by 90,000 in November, above expectations for an increase of 40,000, while October figures were revised to an increase of 180,400. The unemployment rate decreased to 6.8% for November, below expectations for 7.0%. The participation rate increased to 66.1%, above expectations of 65.9%. Part time jobs increased by 5,800 and full time jobs increased by 84,200.
- Australian building approvals increased 2.6% month-on-month to November, compared to the previous level of 3.3% (revised) for period ending October.
- The Institute for Supply Management (ISM) Manufacturing Index recorded 60.7 in December, above consensus for 56.8, and above the 57.5 recorded in November. Of the 18 manufacturing industries, Apparel, Leather & Allied Products and Furniture & Related Products were the industries that reported the highest growth. Printing & Related Support Activities and Nonmetallic Mineral Products were the two industries that reported a contraction in December. The ISM Services Index recorded 57.2 in December, above consensus for 54.5 and above the 55.9 recorded in November. Of the 18 services industries, the top performers in December were Management of Companies & Support Services and Wholesale Trade. Arts, Entertainment & Recreation and Accommodation & Food Services were the two industries that reported the highest contractions over the month.
- US Non-Farm Payrolls decreased by 140,000 in December, below the 336,000 increase (revised) recorded for November. The unemployment rate remained at 6.7% over December, below expectations for 6.8%.
- US GDP third estimate for Q3 2020 is 33.4% quarter on quarter (QoQ) annualised, above expectations for 33.1%.
- The Caixin Manufacturing PMI in China recorded 53.0 in December, below expectations for 54.7, signalling a softer improvement in manufacturing conditions.
- The preliminary estimate of the European Core CPI recorded 0.2% over the year to December, in line with expectations.
- The Eurozone composite PMI increased to 49.1 in December, below expectations for 49.8.
- The final estimate recorded for Q3 2020 Eurozone seasonally adjusted GDP is 12.5% QoQ and -4.3% YoY.
The Australian share market underperformed its hedged overseas counterpart over the month, as the S&P/ASX 300 Index returned 1.3%. The S&P/ASX Mid 50 was the strongest relative performer, increasing 3.4%, while the S&P/ASX 50 was the weakest, returning 0.7% over the month.
The best performing sectors were Materials (+8.8%) and IT (+8.6%), while the weakest performing sectors were Utilities (-5.4%) and Healthcare (-4.7%). The largest positive stock contributors to the index return were BHP, Fortescue and Afterpay with absolute returns of 11.9%, 29.4% and 24.2% respectively. In contrast, the most significant detractors were CSL, Westpac and QBE Insurance with absolute returns of -4.7%, -3.6% and -14.3%, respectively.
The broad MSCI World ex Australia (NR) Index decreased 0.5% in unhedged terms and increased 3.4% in hedged terms over the month, as the Australian dollar (AUD) appreciated against all major developed market currencies. In AUD terms, the strongest performing sectors were IT (+0.9%) and Consumer Discretionary (+0.7%), while Utilities (-2.7%) and Real Estate (-2.5%) were the weakest performers. In AUD terms, the MSCI Small Caps (TR) Index was up 2.6% and MSCI Emerging Markets (NR) Index was also up 2.5% over December.
Over December, the NASDAQ increased 5.7%, the S&P 500 Composite Index increased 3.8% and the Dow Jones Industrial Average increased 3.4%, all in USD terms. In local currency terms, major European share markets experienced positive returns as the CAC 40 (France) increased 0.8%, FTSE 100 (UK) increased 3.3% and the DAX 30 (Germany) increased 3.2%. In Asia, the Indian S&P BSE 500 (+7.7%), Hong Kong Hang Seng (+3.4%), Chinese SSE Composite (+2.4%) and Japanese TOPIX (+3.0%) had solid positive returns.
The Real Assets sector achieved broadly positive returns over December. The Global Real Estate Investment Trusts (REITs) Index increased by 2.6% over the month and the FTSE Global Core Infrastructure 50/50 Index returned 0.3% (both in AUD hedged terms). Domestic REITs increased 0.6% over December, whilst the Australian Direct Property (NAV) returned 0.4% on a one-month lagged basis.
Global bond markets were broadly positive over December, with the Barclays Capital Global Aggregate Bond Index (Hedged) returning 0.3% and the FTSE World Government Bond (exAustralia) Index (Hedged) returning 0.1%. Ten-year bond yields decreased in most markets including UK (-10bps to 0.24%), Germany (-1bp to -0.58%) and Japan (-1bp to 0.02%), whilst the US yield increased (+8bps to 0.91%). Two-year bond yields were mixed over the month, decreasing in the US (-2bps to 0.13%) and the UK (-14bps to -0.16%), remaining flat in Japan (-0.12%) and increasing in Germany (+4bps to -0.71%).
Returns for Australian bondholders were mixed over December, with 10-year (+9bps to 0.98%) and five-year (+5bps to 0.35%) bond yields increasing, and two-year bond yields decreasing (-3bps to 0.07%). Of the Bloomberg Ausbond indices, the Bloomberg Ausbond Inflation Index produced the highest return, increasing 1.2% over the month.
The AUD Trade Weighted Index increased to 63.4 over December, up by 3.1% from November. The AUD appreciated against all major developed market currencies, including the US Dollar (+4.7%), Japanese Yen (+3.5%), Euro (+1.5%) and Pound Sterling (+2.1%).
Iron Ore increased by 21.5%, finishing the month at US$158.5 per metric tonne. The S&P GSCI Commodity Total Return Index increased 1.2% over the month. Gold prices increased from November finishing the month at US$1,897.8 per ounce and the oil price increased 8.8% to US$51.9 per barrel over December.