December 2020 Market Update
The Australian dollar experienced a strong month in December, whilst government bond yields rose given the optimistic economic outlook. Credit yields also finished the year tighter than where they were pre-pandemic.
As we all know, 2020 was an unprecedented year – not only for the world economy, but for financial markets too. That’s because in an attempt to curb the spread of the Coronavirus, many countries implemented lockdowns and physical-distancing measures which rapidly shut down the world economy. Many investments – which are sensitive to economic developments – consequently went from all-time highs in February to dramatic lows in March. Higher-risk asset classes like shares, property and infrastructure were particularly impacted as investors lost confidence in world developments and consequently adopted a less-risky approach to investing by turning to more conservative investments such as cash and fixed interest. So, what do we make of all this?
While financial markets began to recover after the ‘severe’ and indiscriminate sell-off in March, the subsequent recovery hasn’t been even across all asset classes and sectors. For example, Executive Manager Peter Dymond says that while the Energy sector fell to significant lows, in some markets other sectors such as Financials or Information Technology came back strongly. However, the impact on markets has not been consistent. “We’ve seen the likes of the US come back to all-time highs,” he says. “But if you look across global shares more broadly, Australia is maybe 5%–7% below its highs, whereas the US is easily 5%–7% above them.”
The uneven recovery extended regionally – due, in part, to the mix of investments in each country. For example, Australia has a different composition of sectors that make up the local share market and as a result had a different experience to countries like the US. “What we saw in the Australian market was strong performance in certain sectors like Information Technology,” explains Ben Lam, Senior Investment Manager for Australian equities. “But we have a much smaller allocation to Information Technology stocks, so while it was the strongest performing sector for Australia, it was also quite a small part of the market.”
With certain parts of the Australian market appearing to rebound, it seems the impact of Chinese sanctions on Australian exports weren’t quite as negative – instead translating into a stock-specific issue. “Iron ore prices have been extremely high throughout the year, given the rise in prices and the demand within China,” Ben continues. “But at the same time, there has been some tension between Australia and China, leading to some stocks suffering – for example, Treasury Wine Estates after China’s wine tariffs. So rather than a broader outcome, it really becomes a stock-specific outcome.”
The consensus view is that the successful rollout of Coronavirus vaccines is essential to the market recovery. Peter says that this success would support investments, particularly shares, because that would mean we are ultimately experiencing a recovery and a return to economic normality. “However, if that scenario doesn’t play out, it could have a disproportionate impact on markets,” he says, noting that the consensus view is also a narrow one which presents a risk to markets.
On the other hand, if the situation turns out to be better than anticipated, we could see a pull-back in central bank and government stimulus sooner rather than later. “That’s when you face the potential for an interest rate shock of some form reflected in financial markets, which could produce rapid movements in the value of investments such as shares,” Peter continues. But the market is behavioural, particularly over a short timeframe. This means it doesn’t actually need to see changes occur as a result of a rollback in support – rather, markets are influenced by the mere discussion (or sentiment) surrounding such factors. “It could be as simple as messaging from the Reserve Bank or the Federal Reserve as to their outlook,” Peter says. “We saw that happen just after the Global Financial Crisis in what was referred to as the ‘taper tantrum’.”
Looking ahead, there’s an opportunity for active management to help navigate investors through changing conditions and changing consensus. Navigating the changing environment, Peter says, is where things may get a bit rocky – so that’s where active management can play a role. Scott Tully, General Manager of Investments, agrees – noting there will be opportunities for people to identify investments that will do well, even if the direction of markets is dependent largely on whether the consensus plays out or not. Still, he says, there are risks and opportunities to any investment or management style depending on individual investors. “Investing in a passive portfolio – as in, the benchmark – still offers investors exposure to the markets. So there are trade-offs there between the potential benefits that active managers bring and the fact that you’ve just invested in the market at all, even passively,” Scott concludes. “Like every investment year, 2021 will be interesting.”
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Unless otherwise specified, this document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at the date of publication. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including Colonial First State or any member of the Commonwealth Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. Colonial First State is the issuer of interests in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice Wholesale Pension, FirstChoice Employer Super offered from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. It also issues interests in the Rollover & Superannuation Fund (ROSCO) and Personal Pension Plan (PPP) offered from the Colonial First State Rollover & Superannuation Fund ABN 88 854 638 840. Colonial First State also issues other investment products made available under FirstChoice Investments and FirstChoice Wholesale Investments, other than FirstRate Saver, FirstRate Term Deposits and FirstRate Investment Deposits which are products of the Commonwealth Bank of Australia ABN 48 123 123 124, AFS Licence 234945 (the Bank). Colonial First State is a wholly owned subsidiary of the Bank. The Bank and its subsidiaries do not guarantee the performance of FirstChoice products or the repayment of capital from any investments. This document provides information for the adviser only and is not to be handed on to any investor. It does not take into account any person’s individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) before making any recommendations to a client. Clients should read the PDS before making an investment decision and consider talking to a financial adviser. PDSs can be obtained from colonialfirststate.com.au or by calling us on 13 18 36.
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