Market Update October 2020

Global equity markets broadly fell in October as COVID-19 cases surged and geo-political risks increased. 

The value of the Australian Dollar decreased against major currencies, somewhat enhancing 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 (RBA) published their annual report [1] in October which, among other items, discussed their objectives and performance over the 2019/20 financial year. The foreword of the report written by the Chairman of the RBA, Philip Lowe, stated, “It is likely, though, that Australia will experience relatively high unemployment over the next couple of years and that inflation will be below target. Addressing the high rate of unemployment will be an important national priority. This will require ongoing support to aggregate demand through fiscal and monetary stimulus.” We think this implies that interest rates in Australia will remain low for some time.

Trade tensions increased between Australia and China in October as Chinese customs authorities told Chinese companies to stop importing coal from Australia. Whilst this has not led to a complete halt in coal being exported to China, it is unknown when typical trade volumes will return.

New Zealand held their general election in October, with the Labour Party, led by incumbent Prime Minister Jacinda Ardern, winning a majority of seats. This was the largest single party win since 1951 and the first majority win since the electoral system was reformed in 1996.

The United States had a tumultuous October from a political perspective ahead of an upcoming polarising election. On the 3rd of October, President Trump announced he and the First Lady had tested positive for COVID-19. President Trump was admitted to Walter Reed Hospital initially, however he returned to the White House on the 6th of October. The second presidential debate between incumbent President Trump and former Vice-president Joe Biden was cancelled with both candidates opting to run a Town Hall instead, simultaneously, on the 16th of October. The third and final presidential debate took place on the 22nd of October.

Talks around a fourth phase of stimulus in the United States were ongoing throughout the month of October. The Democratic controlled House of Representatives passed a bill supporting a stimulus package of US$2.2trillion in early October, while the Republican controlled Senate pushed back. Negotiations shifted throughout the month with House Speaker, Nancy Pelosi, dealing directly with the Treasury Secretary, Steve Mnuchin, and President Trump in an effort to pass a stimulus package. Despite the lack of fiscal support, in the first quarter of the 2020/21 financial year, the United States economy had a record-breaking quarter where GDP grew by 7.4%, beating expectations by 1.1%. Despite this, GDP remains 3.5% below its pre-pandemic peak.

COVID-19

Reported global coronavirus case numbers exceeded 46.7 million at the end of October, with a total of over 1.2 million fatalities. Daily reported cases of infections surged in October and surpassed 570,000 on a global basis, almost doubling the previous daily record (set in September). The United States and the majority of Western Europe saw a rapid increase of infections to record levels from mid-October onwards. France, Germany and the United Kingdom have all announced lockdown measures of varying strictness to prevent healthcare systems from becoming overwhelmed.

Vaccine development continued throughout October with 11 vaccines either continuing or entering stage 3 trials. Two leading candidate vaccines for COVID-19 that use a genetic approach, Moderna and BionTech, are awaiting further results and have speculated that their respective vaccines could be ready for emergency use by the end of 2020. Johnson & Johnson have developed a viral vector approach to creating a vaccine and their stage 3 trial was put on pause on 12 October to review an adverse case, however, the trial resumed 11 days later [2].

Australia continued its downward trend in COVID-19 infections in October. The Premier of Victoria, Daniel Andrews, announced that Victoria entered the Third Step towards COIVD-Normal on the 27th of October, with the 14-day average of COVID cases dropping below 5 (the threshold set by the Victorian Government) on the 25th of October. The primary restrictions eased were the removal of the “4 reasons” to leave home and the extension of the travel distance limitation from 5 km to 25 km for Victorians living in Metropolitan Melbourne.

Equities

Foreign equity markets decreased substantially throughout October. Developed markets (excluding Australia) returned -3.2% on a currency-hedged basis (and -1.1% in Australian dollar terms), underperforming emerging markets which returned +1.5% in local currency terms. The best international performer was the Japanese Nikkei 225 Index which returned -0.9% for the month.

In contrast to overseas markets, the Australian stock market (ASX 200) generated a return of +1.9% during October, despite only 5 out of 11 sectors contributing positive returns. Information Technology, Financials and Consumer Staples were the standout performers returning 9.0%, 6.3% and 4.8% respectively. Industrials was the standout negative performer returning -3.9%, followed by Utilities and Materials.

From a developed market sectoral perspective, 2 out of 11 sectors produced positive returns and 9 contributed negative returns. Utilities was the top performing sector returning 2.0% with Communication Services being the only other positive returning sector producing a return of 1.1%. Energy, Information Technology and Health Care were the worst performing sectors returning -5.2%, -5.2%, and -4.9% respectively.

Bonds

The Australian government bond yield curve steepened over October with the two-year yield decreasing by 0.043% and the ten-year yield increasing by 0.041%. The cash rate set by the RBA remained unchanged in October along with their other core policies.

All major developed market global government bond yields increased over ten-year terms, except European bonds. Across two-year terms, global government bond yields were mixed, however all major government bond yield curves steepened throughout October to varying extents.

Currencies

The Australian dollar weakened against all major currencies for the second consecutive month due to a lower appetite for risk (risk-off sentiment). The AUD decreased by 3.4%, 2.6% and 2.3% against the Chinese Renminbi, Japanese Yen, and Swiss Franc respectively.

The Australian Dollar finished the month at 0.7028 US Dollars, down 1.3 US cents over the month.

Commodities

WTI oil fell 11.0% and the price of Brent crude oil decreased 8.5% over the month due to continued subdued global demand forecasts. The S&P GSCI Industrial Metals index increased 3.0% on average, with aluminium being the top performer which rose 6.5%. Regarding precious metals, the price of gold decreased 0.4% and the price of silver increased by 1.8% for the month of October. Notably natural gas rose 32.7% during the month of October.

Performance of key markets to 30 October 2020

Asset class Index Month* (% change) FYTD* (% change) 1 year* (% change)
Australian Shares S&P/ASX 200 Acc. Index 1.9% 1.5% -8.1%
International Shares MSCI World Ex Aust Unhedged A$ -1.1% 2.6% 2.7%
International Shares MSCI World Ex Aust Hedged A$ -3.2% 3.0% 1.1%
US Shares S&P 500 Index -2.7% 6.0% 9.7%
UK Shares FTSE 100 Index -4.7% -8.6% -20.5%
Japanese Shares Nikkei 225 Index -0.9% 3.8% 2.2%
Australian Listed Property S&P/ASX 200 A-REIT Index -0.4% 6.6% -18.0%
Australian Fixed Interest Bloomberg AusBond Composite Index 0.3% 1.3% 4.0%
Australian Cash Bloomberg AusBond Bank Bill Index 0.0% 0.0% 0.5%
Currency AUD/USD -1.9% 1.8% 1.9%

*Percentage change in returns are for periods over the month of October (Month) or for the financial year I July to 30 October 2020 (FYTD) or for the year 31 October 2019 to 30 October 2020 (1 year). Past performance is not an indication of future performance.

[1] https://www.rba.gov.au/publications/annual-reports/rba/2020/pdf/2020-report.pdf

[2] https://www.jnj.com/our-company/johnson-johnson-prepares-to-resume-phase-3-ensemble-trial-of-its-janssen-covid-19-vaccine-candidate-in-the-us