Monthly economic update with MLC, November 2020

Funds Management

by Clive Tompkins

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MLC Asset Management Senior Economist Bob Cunneen discusses robust November gains in the markets, the US Presidential election and positive signs in the Australian economy.

Global share markets made very robust gains in November, with the Morgan Stanley index up more than 11 per cent in local currency terms. Wall Street made record highs, and this rally was driven by the very promising news on vaccines. So, we had the announcement of three possible vaccines, Pfizer and BioNTech, Moderna, and Oxford University and AstraZeneca. And this positive news on the vaccine outweighed the concerns about the spread of the virus in Europe and the United States. In particular, Europe actually went into a lockdown in November, so it's remarkable that we had this global share market rally during a virus threat.

Markets were initially concerned about the outcome of the 3 November presidential and congressional elections, but as the counting continued over a sequence of days, Joe Biden emerged as the new president to be inaugurated on 20 January. Now, although President Trump is contesting the outcome of this election, it looks likely that those legal challenges will fail. However, the make-up of Congress is still to be decided. So in terms of the 100-seat Senate, currently the Republicans have 50 seats, the Democrats 48. There are two seats in Georgia that require another vote on 5 January, so we don't know the final outcome of the US Senate.

Now, this is a potential concern to financial markets in the sense that if the Democrats win control of these two Senate seats, it's a 50/50 stalemate in the Senate. However, the Vice-President, Kamala Harris, has the deciding vote. So, potentially, the Biden platform of a rise in corporate tax rates by 7 per cent, so taking the American corporate tax rate from 21 per cent to 28 per cent, is still a possibility. So, we're still awaiting the 5 January Georgia Senate results.

Leading the charge for the Australian share market was a +28 per cent gain for the energy sector. In particular, the rebound in global oil prices in November favoured energy shares. But other sectors also did particularly well, such as financial sector shares. They were up nearly 16 per cent. So, we had some positive news on the banks’ loan deferral programs. We're seeing a reduced amount of support, and there are signs that the Australian economy is doing better, in particular in October and November.

In terms of the real estate investment trusts, we saw a +13 per cent gain, and this was largely on the back of the positive vaccine development news. So, the hope is that, as employees return to their offices, as consumers feel more comfortable in the shopping centres, that will particularly help the real estate investment trust sector.

The Australian economy appears to be getting better. In the first week of December, we had some positive news on the September quarter gross domestic product. So, the economy expanded by 3.3 per cent for the September quarter, and this follows the deep recession of the June quarter, where the economy fell 7 per cent. So, the Australian economy looks like it's on the road to recovery. We've also seen some very positive signs in the leading indicators. So, business and consumer surveys, car sales, job advertisements have all picked up speed over recent months, which suggests that this is a sustainable recovery.


Ends

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