Stock Market Wrap-up – November 2020

The S&P/ASX 200 Accumulation Index returned 10.2% during the month. Australian equities enjoyed a strong month (in fact, the best monthly return since 1992) on positive COVID-19 vaccine news, additional quantitative easing measures locally and increased certainty regarding the US presidential election result. There was a sharp rotation into value stocks and those deemed “COVID-19 losers” also saw strong support. Australian equities kept pace with developed markets during the month. In major global developed markets, the DJ Euro Stoxx 50 was up 19.3%. Japan’s Nikkei 225 was up 15.1%, the UK’s FTSE 100 was up 12.7% and the US S&P 500 was up 10.9%.

The Reserve Bank of Australia (RBA) delivered a rate cut and additional quantitative easing to support the recovery at its 3 November meeting. The cash rate was cut from 0.25% to 0.10%, as was the 3-year yield target. The RBA also announced that it would purchase AUD100 billion of government bonds (largely around the 5- to 10-year maturities) over the next six months.

Domestic economic data releases in November were mostly upbeat. Employment rose by 178,800 positions in October, significantly exceeding market expectations for a fall in employment. The unemployment rate ticked up to 7.0%, which was also better than expectations. The NAB Survey of Business Conditions showed improvement, rising to 1 in October (from 0 the previous month), with business confidence also turning positive, rising to 5 (from -4). Retail sales were down 1.1% in September. National CoreLogic dwelling prices saw a second consecutive monthly rise in November, ending the month up 0.8%.

Capital raisings continued in November. Insurance Australia Group raised AUD 750 million in capital to strengthen the balance sheet in response to losing their business interruption insurance test case in NSW. GUD Holdings also raised capital totalling AUD 70 million in order to fund its acquisition of AMA Group’s Automotive Components and Accessories division.

Sector returns were largely positive in November. The best performing sectors were energy (28.5%), financials (16.1%) and communication services (13.6%). Real estate (13.6%) and industrials (12.3%) also outperformed the broader market. Consumer discretionary (8.5%), materials (7.3%), information technology (4.6%), healthcare (2.7%) and utilities (1.5%) lagged the market. Consumer staples (-0.7%) was the worst performing sector and the only one to post negative returns.

Energy was the best performing sector on the back of stronger oil prices as the prospect of successful COVID-19 vaccines saw improved future demand prospects for oil. Woodside Petroleum (27.7%), Santos (30.2%), Origin Energy (29.5%) and Oil Search (41.6%) were the key drivers of sector performance.

The financials sector continued its outperformance from the month prior, driven by strong performance from the big four banks: National Australia Bank (24.7%), ANZ (22.2%), Commonwealth Bank (14.6%) and Westpac (14.1%). Banks benefitted from the value rotation together with reduced tail risks around the credit cycle following a fall in deferred mortgages and SME loans.

Communication services also outperformed. Key drivers of outperformance included Telstra (14.5%), REA Group (22.8%) and Seek (21.1%).

The Healthcare sector underperformed as defensives lagged the market. Underperformance was led by Sonic Healthcare (-5.4%), Ansell (-6.9%) and Pro Medicus (-8.8%). Sector heavyweight CSL (3.4%) also lagged the market.

The utilities sector underperformed with APA Group (-1.3%) and AusNet Services (-4.9%) posting negative returns. AGL Energy (8.2%) and Spark Infrastructure (3.2%) also lagged the broader market.

The consumer staples sector was the worst performing sector. Key detractors included Woolworths (-3.1%), Treasury Wine Estate (-6.3%) and Elders (-5.4%). Treasury Wine Estate fell as Chinese tariffs on certain categories of wine were announced on 27 November. The company admitted demand from China would be extremely limited if the tariffs remain in place.

Source: Brad Potter – Head of Australian Equities – Nikko AM