Markets:
- Both local and global stocks rose this week buoyed by positive vaccine news, declining virus cases, and potential US fiscal stimulus.
- Equity markets have seen increased volatility over the last couple of weeks following the battle between US retail investors (punters) and US hedge funds which played out quite publicly. Trading platforms blocked buying on some stocks, prompting debate as to who they were protecting. Fair to say that both sides have attracted regulators’ attention. Hedge funds largely short (borrow and sell stock to drive share prices down) companies who are in trouble whilst the retail investors in this instance were piling into those same stocks (sometimes using leverage) with social media and web forums used to encourage speculation.
- With company reporting season well underway, results thus far from the US were strong with 84% of companies topping analyst expectations, well above the 75% beat rate in the past 4 quarters.
- In local stock news, Coca Cola’s European business’ attempt to buy the Australian Coca Cola Amatil has met no resistance from the Foreign Investment Review Board meaning the deal will likely proceed.
- Tabcorp shares rose after the company reported that there had been unsolicited offers made for its wagering and media business. The board is assessing the offers.
- The Aussie dollar fell this week following the Reserve Bank of Australia’s announcement of more quantitative easing and with the US dollar strengthening.
Economics:
- The Reserve Bank of Australia maintained it’s very loose policy course keeping the cash rate at 0.1%, intervening in markets to maintain a 0.1% yield on 3 year Australian government bonds, a funding facility for the banks, whilst also announcing a new $100 billion round of quantitative easy (bond buying) to support the government’s fiscal stimulus efforts and try to keep a lid on the Aussie dollar rising.
- According to the RBA, credit grew in December and is now up by 1.8% over the year. Credit for housing increased in December driven by a solid lift in owner-occupier credit. Credit for business lifted for the first time in 7 months. Housing credit is up by 3.5% over the year. Expect that to continue increasing in 2021. Personal credit finished down more than 12% over the year, not surprising given high household savings rate and flourishing buy-now-pay-later sector.
- New lending (excluding refinancing) for Australian housing reached further record highs in December up by 8.6% in the month with strong increases for both owner-occupiers and investors. The number of owner-occupier first home buyer loans rose 9.3% in the month. The value of new construction lending continues to surge. Dwelling prices rose by 0.7% across the capital cities combined in January.
- Australian residential building approvals surged by almost 11% in December, up almost 23% on the year. Approvals for detached (single-dwelling) houses surged by almost 15%. Approvals are being supported by low borrowing costs, banks willingness to lend, pent up demand, high household savings rates, inability to travel and spend offshore, government stimulus measures, and changing work/lifestyle habits (ie. work from home). These results will obviously help support dwelling investment in the quarters ahead.
- The advance estimate of 4th quarter US economic growth was 4%, coming in close to consensus, but details showed weakness in consumer and government spending. There was strength in investment which might imply a positive outlook once vaccines are taken up more widely, less restrictions on mobility and activities, and more fiscal stimulus to come.
- A key US manufacturing survey showed mixed results with activity slowing slightly in January while a measure of prices paid by factories for raw materials and other inputs jumped to its highest level in nearly 10 years. That, together with rising wages, is likely to see US inflation continue to rise from here.
Politics:
- In vaccine news, we saw two new vaccines provide positive phase 3 results. Novovax’s results showed efficacy in line with Moderna’s vaccine, but with better tolerance and greater ability to ramp up production. However, efficacy fell for different covid-19 strains, but will provide sufficient protection against severe illness. A booster may be required. Johnson & Johnson was the other vaccine developer producing a single shot vaccine that doesn’t need to be refrigerated. However, efficacy was lower than the other vaccines, but again it will be sufficient in preventing severe illness. The company is now running a 2-dose trial to see if efficacy rises. The daily rate of vaccinations has been rising in the US, with the UK running at 2 million a day, and Israel having vaccinated more than 30% of its population.
- Vaccine manufacturing and distribution is firmly in the crosshairs of politics, much like healthcare and science was for much of 2020, and with the European Union looking to tighten rules on the export of vaccines to ensure European supply gets priority. Companies seeking to ship vaccines to countries outside the bloc must obtain authorisation. Within the US, Trump’s much derided vaccine distribution playbook has largely been adopted by President Biden and is on pace for 1 million shots a day. The AstraZeneca vaccine received approval from the European medicine regulator.
- US President Biden has signed more than 40 executive orders after promising to lead via unity and bi-partisanship…..Both Democrat house and senate leaders have also introduced a resolution which would allow President Biden’s US$1.9 trillion stimulus plan to pass the senate with a simple majority (ie. no Republican support). Ruling by stealth. Republicans have proposed an alternative US$600 billion stimulus plan. It’s likely the Republican plan is more than sufficient for now given the almost US$1 trillion passed at the end of 2020.
- In other political news, Russian President Putin faces mounting pressure at home after the 2nd straight week of protests and arrests with Putin’s confidence rating fall to all-time lows. Italy is again without a functioning government as talks continue on building support for a new coalition to lead the country to avoid new elections. Myanmar’s (Burma) military has detained the country’s leader and declared a state of emergency following the leader’s landslide victory in November.
Author
Chris Lioutas, Director, Insight Investment Consultants
Chris holds the position of asset consultant for Maxim Advisors and is a current sitting member of Maxim's investment committee.
With permission of the author, this article is presented by Maxim Private Clients Pty Ltd ASFL No. 511972
Maxim Private Clients Pty Ltd ABN 47 611 614 398 AFSL No. 511972
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