Economic Review
Global Equity Markets
Global shares fell in September after August’s strong gains. The coronavirus continues to weigh on global economies with new infections approaching three hundred thousand per day. Particularly concerning is the continued acceleration of new cases in India as well as the recent revival in France, Spain and Britain. Political risk is also becoming more prominent. The US Presidential election, wrangling in the US Congress between Republicans and Democrats over further budget support measures as well as US-China tensions over human rights and technology were key concerns during September.
Global shares fell in October given multiple concerns. The coronavirus threat has intensified as the number of new cases in Europe and the United States accelerated. Lockdowns have been announced in France, Germany, Spain and Britain. Political risk has also become more concerning. The US Presidential election in November caused consternation with the prospect of a contested result. The failure of Congress to extend further budget support measures has seen investors also question whether the recent promising signs of a global recovery are a mirage.
Promising signs in US business surveys and employment gains were initially welcomed by investors. The US economy recorded a strong economic recovery in the September quarter with GDP expanding by 7.4%. This comes after the sharpest GDP decline of -9% in the June quarter since records began in 1947. However this recovery optimism faded over the course of October with rising virus infection cases and political concerns. The Republican and Democrat parties failed to agree on new budget measures. November’s Presidential and Congressional elections cast a shadow with markets worrying over the possibility of contested results with legal challenges deciding the outcome.
European shares fell sharply in October with the revival in new virus cases threatening economic activity. Europe’s PMI business surveys suggest that recovery prospects have dimmed with businesses worrying about the looming lockdowns. German Chancellor Angela Merkel warned of a long and hard winter when announcing Germany’s lockdown would extend to 30 November, following similar announcements by France and Spain. Britain also joined the restrictions on business and personal activity with a national lockdown extending to 1 December.
Asian share markets recorded a mixed performance. China benefited from signs of a revival in industrial production and retail sales. But Japanese shares disappointed in line with global shares as doubts over the global recovery weighed.
Table 1: Global share market performance – October 2020
US S&P 500 -2.7%
US Dow Jones -4.5%
Euro Stoxx 50 -7.4%
German DAX -9.4%
UK FTSE 100 -4.7%
Japan Nikkei 225 0.9%
China Shanghai Composite -0.2%
Source: Factset, IRESS, October 2020
Australian share market review
Australian shares provided a positive surprise with a modest gain in October. The Federal Budget’s announcement of income tax cuts and investment allowances was positively received by investors. News that Melbourne’s virus outbreak appeared to be contained with lockdown restrictions being gradually eased also assisted Australian share prices. Information Technology shares led the market buoyed by a takeover bid for Link Administration and another strong performance from Afterpay. Financial sector shares also surged with optimism that a supportive Federal Budget and Melbourne’s revival would mitigate potential loan losses with business and housing loans deferrals. However the industrials and energy sectors disappointed.
The Australian Dollar (AUD) continued to weaken against the US Dollar (USD), falling by 1.8% during October, to finish the month at USD0.7028.
Table 2: Australian share market performance – October 2020
S&P/ASX 200 Accumulation Index 1.9%
S&P/ASX 200 Industrials Total Return Index 2.8%
S&P/ASX 200 Resources Total Return Index -1.3%
S&P/ASX Small Ordinaries Total Return Index 0.5%
S&P/ASX 200 A-REIT Total Return Index -0.4%
Source: Factset, IRESS, October 2020
Large Caps (S&P/ASX100)
Takeover activity saw Coca Cola Amatil shares up by 30.8% and Link Administration shares rose by 27.9%. Challenger shares also were strong (+25.6%). Flight Centre (-18.2%) was the weakest performer followed by Vicinity (-12.0%) and Aurizon (-11.3%).
Listed property
The S&P/ASX 200 AREIT Total Return Index posted a 0.4% decrease in October, underperforming the S&P/ASX 200 Total Return Index by 2.3%. Industrial AREITs were the strongest AREIT sector, increasing by 2.4%. Diversified AREITs posted a small decline (-0.1%) while Office AREITs (-2.3%) and Retail AREITs (-3.3%) were weakest on concerns about structural changes to how we work and shop.
Written 9 November 2020.
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