Market Update December 2020

Global equity markets experienced strong returns in December as early stages of vaccine distribution drove investor confidence.

The value of the Australian Dollar increased against major currencies, diminishing the returns of overseas investments when measured in Australian dollar terms. Global investment grade credit spreads contracted over the month (i.e. the market’s perceived risk of lending to high quality companies decreased).

The Reserve Bank of Australia had its final meeting for the year on 1 December and left its existing policies unchanged. The minutes of that meeting noted that “given the outlook for both employment and inflation … monetary and fiscal support will be required for some time.” [1]

Throughout December the United States continued the constitutional process to inaugurate President-elect Joe Biden. On 14 December, the individual states cast their electoral college votes in line with the general election held on 3 November. President Trump’s legal challenges against the election did not alter the election results. The US Congress certified the electoral votes in early January, which is the final step before inauguration on 20 January 2021. Talks regarding another stimulus package were ongoing in the US throughout December with the Republican held Senate pushing back on the deal put forward by the Democrats. On 22 December Congress passed a relief bill for US$892 billion, which included a $600 payment to citizens. In addition, the Democrats won both Georgia Senate run-off elections in early January which will result in the Democrats controlling the Senate.

The United Kingdom officially left the European Union (EU) at 11:00pm on 31 December (UK time), along with the single market and the customs union. Negotiations finally concluded with a deal encompassing £660 billion of trade in goods and services per year being agreed to by both parties on 24 December (UK time).  While the deal at least partially resolves the main sticking points between the parties relating to maintaining product and service standards with the EU market, fishing and a dispute resolution mechanism, there are major areas such as financial services that are not covered in the deal and will need to be worked out in future.

COVID-19

Reported global coronavirus case numbers exceeded 84.5 million at the end of December 2020, with a total of over 1.8 million fatalities [2]. Reported cases of infections continued to climb and surpassed 760,000 per day on a global basis at its peak on 31 December. The United States, Russia, the United Kingdom and Germany in particular saw infections increase to record levels in December. 

Vaccine distribution began in December as some countries approved the Pfizer/BioNTech and Moderna vaccines for emergency use purposes. In early December the United Kingdom became the first country to approve the Pfizer vaccine and within one week the first dose was administered to a member of the public, the first in the world outside of a clinical trial. Dozens of countries have since approved one or more of the vaccines and have begun the immunisation process.

Australia saw one death due to COVID-19 during December (for the second consecutive month) and, from mid-December, new daily cases of infection ranged between 10 and 50. The number of infections  in Australia predominantly came from New South Wales (NSW) in December. State border restrictions were enforced between various states and further restrictions in NSW applying to Greater Sydney, Central Coast and Wollongong take effect from early January.

Equities

All major foreign equity markets increased throughout December. Developed markets (excluding Australia) returned 3.4% on a currency-hedged basis (and -0.5% in Australian dollar terms), underperforming emerging markets which returned 6.1% in local currency terms. Of the major markets, the best performer was Japan (Nikkei 225) which returned 4.0% for the month.

The Australian stock market (ASX 200) generated a return of 1.2% during December, however, only 4 out of 11 sectors contributed positive returns. Information Technology and Materials were the two standout performers returning 9.4% and 8.8% respectively. Utilities, Healthcare and Industrials were the worst performing sectors returning -6.8%, -4.9% and -3.0% respectively.

In contrast to the Australian stock market, from a foreign developed market sectoral perspective, all 11 sectors produced positive returns. Information Technology, Consumer Discretionary and Materials were the top performing sectors returning 5.5%, 4.9% and 4.3% respectively. The sector that performed the worst was Utilities (for the second consecutive month) but which still managed a return of 1.0%.

Bonds

The Australian government bond yield curve continued to steepen throughout December with the two-year yield decreasing by 0.018% and the ten-year yield increasing by 0.074%. The cash rate set by the RBA remained unchanged at 0.1% throughout December.

Major developed global government bond yields produced mixed results over two-year and ten-year terms. For over ten-year terms, the United States government bond yield increased the most by 0.074%. When considering two-year terms, the European government bond increased the most by 0.043%.

Currencies

The Australian dollar strengthened against all major currencies due to a higher appetite for risk (risk-on sentiment). The AUD increased by 4.8%, 4.1% and 3.7% against the United States Dollar, Chinese Renminbi, and Japanese Yen respectively.

The Australian Dollar finished the month at 0.7694 US Dollars, up 3.5 US cents over the month. 

Commodities

WTI oil rose 7.0% and the price of Brent crude oil increased 8.8% over the month due to increased global demand forecasts. The S&P GSCI Industrial Metals index increased 6.2% on average, with iron ore being the strongest performer which rose 15.4%. Regarding precious metals, the price of gold increased 6.8% and the price of silver increased by 16.6% for the month of November. 
 

Performance of key markets to 31 December 2020

Asset class Index Month* (% change) FYTD* (% change) 1 year* (% change)
Australian Shares S&P/ASX 200 Acc. Index 1.2% 13.2% 1.4%
International Shares MSCI World Ex Aust Unhedged A$ -0.5% 9.7 5.7%
International Shares MSCI World Ex Aust Hedged A$ 3.4% 18.9% 10.6%
US Shares S&P 500 Index 3.8% 22.2% 18.4%
UK Shares FTSE 100 Index 3.3% 6.4% -11.5%
Japanese Shares Nikkei 225 Index 4.0% 24.1% 18.3%
Australian Listed Property S&P/ASX 200 A-REIT Index 0.4% 21.2% -4.6%
Australian Fixed Interest Bloomberg AusBond Composite Index -0.3% 0.9% 4.5%
Australian Cash Bloomberg AusBond Bank Bill Index 0.0% 0.0% 0.4%
Currency AUD/USD 4.8% 11.5% 9.6%

*Percentage change in returns are for periods over the month of December (Month), the financial year 1 July 2020 to 31 December 2020 (FYTD) and for the year 1 January 2020 to 31 December 2020 (1 year). Past performance is not an indication of future performance.

[1] https://www.rba.gov.au/monetary-policy/rba-board-minutes/2020/2020-12-01.html
[2] https://www.worldometers.info/coronavirus/