SIV Quarterly Update: Dec 2020

SIV Quarterly Update: December 2020

2020, what a year! Thank goodness for Zoom.

Global equity markets booked a third-straight quarterly gain in the three months to 31 December 2020, as investors rode out a chaotic political scene in the US and a resurgent coronavirus to focus on further stimulus from the new Democrat administration and other governments and global central banks, and widening availability of COVID-19 vaccines. Australia's S&P/ASX 200 Index finished in the middle of the pack versus its developed-market counterparts.

The local benchmark climbed 13.7% on an accumulation basis (including dividends). The S&P/ASX 200 Index gained 13.3% on a price basis in the quarter but ended a tumultuous year down 1.5%, lagging its major developed-market counterparts, with the widest 12-month trading range since the depths of the GFC in 2008.

For the quarter, the local benchmark underperformed the MSCI World Index, which rose 14.7% on an accumulation basis, but outperformed the S&P 500 Index, the Euro Stoxx 50 Index and the FTSE 100. Topping the international league table was Japan, with the Nikkei 225 Index surging a stellar 18.5%, followed by Hong Kong's Hang Seng Index, up 16.2%, and the technology-dominated NASDAQ Composite Index, up 15.6%.

All but two local industry sectors ended higher. Energy, up 26.3% on an accumulation basis, led the way as the crude oil price rebounded over the quarter, followed by information technology, up 24.8%, and financials, up 22.8% (within which the banks sub-index soared 28.5% as dividends resumed and longer-term bond yields rose). Defensive sectors underperformed – utilities slid 5.4% and the CSL-dominated health care category dipped 1.1%, while the industrials' gain of just 4.9% was held back by weakness in toll-road giant Transurban.

The Reserve Bank of Australia cut its benchmark cash rate to 0.10% from 0.25%, as governor Philip Lowe vowed to do whatever it took to spur job creation with the nation facing a bumpy and drawn-out recovery from the pandemic.

The yield curve for Australian bonds steepened – with the three-year yield falling five basis points to 0.11% and the 10-year yield rising 18 basis points to 0.97% – as market confidence in a medium-to-longer term recovery grew. Such a steepening also occurred in the US Treasuries market, where the two-year yield dipped one basis point to 0.12% and the 10-year yield rose 23 basis points to 0.91%. Meanwhile, the Australian dollar climbed more than 7.4% to a near two-year high against the greenback, spurred on by buoyant commodity prices, particularly iron ore. The local currency gained 4.4% against the Reserve Bank’s trade-weighted index.

Iron ore was the standout in buoyant commodity markets, soaring 45.5% to US$156 a tonne, as Chinese steel-mill demand for the key ingredient showed no signs of waning, despite argy-bargy between Beijing and Canberra over politics and trade. Crude oil notched a 26.5% rise to a 10-month high of US$52 a barrel, as confidence in a vaccine-led demand recovery pushed the key commodity sharply higher in November and December. That same confidence also drove all base metals, bar lead, to double-digit gains over the quarter, while in bullion, gold edged up 0.7% to US$1898 an ounce.

For a comprehensive list of market moves in the December quarter of 2020, please refer below:

Outlook

Our macro predictions for 2021.

• Global economy – After a 4% fall this year, real global GDP growth is forecast to rise by 5.0% in 2021, characterised by a stronger second half, as vaccine inoculation widens. Broadly, the contributors to growth are - a lift in service sector activity, recovery in global trade, robust consumer spending and business investment growth. The recovery will remain incomplete though, with global GDP not expected to recover to its pre-pandemic level until after 2021.
• Global equities are expected to move higher in 2021. Concerns we held at the start of the year, such as trade tensions and an ageing economic cycle, have largely cleared throughout 2020, removing some tail risks. Our global research counterparts project double-digit returns for a number of regions.
• Australian economy – After a near-3% fall in 2020, real GDP growth should return to its historical average of 3–3.5% in 2021. Consumption is expected to be the dominant driver as households draw on high savings rates built up during COVID-19, and employment makes a gradual recovery. Closed international borders for much of the year should also see more spending retained domestically.
• Australian equities – Our S&P/ASX 200 target range is 6700–7300. Earnings are yet to regain their falls, but we believe earnings revisions will remain positive. The main change is that we think the market will sustain higher than normal Price Earnings (PE) multiples. Our assumption is 18–19x, due to a rotation out of cash, where returns are being eroded by inflation.

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You may be aware that the Australian Government is currently conducting a review of the BIIP Program, which includes the SIV. Whilst thresholds have not been changed at this stage there is still a real chance that the asset allocation mix is going to be changed with more emphasis being placed on the Venture Capital Private Equity (VCPE) allocation. If any of your family, friends, colleagues or contacts are interested in Australia’s SIV, now would be a very good time to introduce them to us. We would be pleased to assist them.