Market update with Shaw and Partners, October 2020


by Clive Tompkins

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Shaw and Partners Chief Investment Officer Martin Crabb discusses the US election, second coronavirus waves, changes in earnings projections, and the potential of a vaccine, at FNN's Investor Event.

Welcome everyone to another Investor Event. As Clive said, Shaw and Partners are proud sponsorship partners, and we look forward to having a chat with you every month or so and introducing some interesting speakers. Looks like we've got a reasonably good line up again today.

So, I've got the challenge of trying to talk some sense about the markets in less than 10 minutes, which you can imagine is a bit of a challenge, but bear with me. From an investment perspective, obviously the major event everyone's watching is the US presidential election, so let me start there.

We've built up a little bit of a distrust in polls since both the 2016 election, also the Brexit vote, defied the polls. The polls had that a hundred per cent wrong. So, there's a lot of scepticism about polls. But also, in their defence, the polls have got a lot smarter and better at targeting demographics and so forth. They are looking not just at the national statistics in the US presidential election, but looking at the battleground states, and also looking at different demographics, such as uneducated white males, who voted in record numbers for Trump last time around.

So, we think the polls are less likely to be inaccurate this time around. They are showing a pretty substantial lead to Joe Biden with only a week to go. It does look like there'll be a change of President in the US, famous last words.

The issue then becomes: do we have a blue wave? The chances of the Republicans winning the Congress are almost zero, so you'd now look at the Senate. At the moment, the Democrats control the Congress and the Republicans control the Senate. There's 100 Senate seats. They're currently 53 Republican, 47 Democrat, and there's 23 Republican seats up for election and only 12 Democrat seats up for election. So, there is a reasonably good chance that we do get a change of control of the Senate as well, which would give the Biden presidency a clean sweep, and it will allow them to get things like stimulus bills passed pretty quickly.

So, there is a significant lag between the election and the inauguration. The inauguration doesn't happen until January, so you do get this period of limbo where we might know on 4th November that we've got a different government, but we won't actually get anything done until the new year.

So, there's obviously a bit of an issue that the markets have about what happens between here and there. Is there a chance that President Trump, if he's to lose, contests the postal votes in some of the key states? There's a lot of uncertainty around the election outcome. Even if the polls are showing about an 85 per cent probability of a Biden win and about a 75 per cent probability of a clean sweep, there is still a lot of uncertainty.

There's also uncertainty caused by coronavirus, which is probably the next topic that the market's focused on. Again, a pretty tricky one, where we've got second and even third waves. I think the US is now in its third wave of infection. Europe is clearly in its second. And now we've got companies coming out and saying we're very concerned about this second wave, and these lockdowns. One of the big enterprise software companies in the world, SAP, the German company, their shares fell 25 per cent last night, for example, because they warned about fourth quarter earnings being impacted by further shutdowns.

We've seen a bit of a sell off in some of the e-commerce stocks in Australia yesterday. It was quite indiscriminate, it seemed right across the board. That's continuing into our market again today, and there's a whole number of factors contributing to that, ranging from the Ant Financial IPO, which is going to kick off next week --it's going to be the world's biggest ever IPO, almost US$35 billion are going to be raised -- to Daniel Andrews bringing the state of Victoria back to life, and obviously that's an end to the lockdown, and potentially, people moving back from e-commerce to bricks and mortar. So, there's a lot going on in that space, and that's adding to the level of uncertainty.

Against that, we've got to think of the more traditional things we think about when we think about investment markets, which is value and growth. There has definitely been an improvement in the valuation of the market, despite the fact that it's risen probably over 5 per cent in October so far, because earnings revisions are quite positive. So, we're rolling forward from, I suppose, pandemic-impacted earnings to more favourable economic conditions and more favourable earnings outlooks. Obviously, we're seeing, as part of that, analysts starting to upgrade their 2021 earnings estimates, because things just didn't get as bad this year as they could have been.

So, that’s one positive on the horizon, is that we are seeing earnings projections starting to head up now. A key to that is iron ore. Most analysts have $60, $70, $80 long-term iron ore price. It's obviously sitting up in the hundreds at the moment, and so that's a big part of our market and a big part of the earnings of our markets. So, iron ore’s holding up quite well.

The other thing is just optimism about a vaccine. So, as we said in our last catch up, there are currently ten vaccine candidates in phase three clinical trials, and most of them are into the second phase of that. What happens in a phase three trial is you get 50,000 or 60,000 people. Half of them get a placebo, half of them get the vaccine. Then, after one month, the vaccine's re-administered, and so you can see how efficacious the information is.

Now, we're starting to get data from some of those trials starting to come to the market. Most of the companies that are involved in the trials are public companies, so they have a duty and responsibility to keep the market informed. We did have AstraZeneca over night releasing some more data about their trials, which did suggest that it's quite efficacious in both young and old people, and the safety aspects looked quite positive.

On the one hand, we’ve got concerns about coronavirus. On the other hand, we've got potential positivity about a vaccine. And the Australian share market and the world share markets are caught somewhere in between the two, and obviously the election’s a big macro event.

What we're saying to investors is stay the course. You want to be invested in equities. You don't want to be invested in bonds at this time in the cycle. But do have some tail risk hedges in place. So, what I mean by that, if a vaccine gets released, you want to own some banks, maybe some energy stocks, and if we get another shutdown, you probably want to own gold. So, a well-diversified portfolio with lots of companies, and obviously, looking for good opportunities, such as some of the companies that are presenting today. With that, I'll hand it back to you, Clive.


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