What a month in the markets! Global share markets had their best month ever, delivering 11.5% return in the month.
The record breaking month driven by the successful trials of multiple vaccines - it now appears that full-scale distribution of a vaccine will be underway early next year with significant parts of the world vaccinated by late next year. Having a firm timeline for a vaccine allows investors and companies to price in the end to the pandemic, investors can now be confident that we will be returning to our normal way of life at some point in 2021. Some economists and market analysts are talking about the fact we are now at the start of a new expansion cycle.
The New Zealand economy continues to go from strength to strength, causing the New Zealand dollar to rise; this reduces returns for New Zealand based investors. The New Zealand dollar appreciated by 6.5%, reducing the returns for New Zealand investors down to 4.8%.
Many major indices reached all times highs during the month; the broader S&P 500 peaked at 3,638 on 27 November (the pre-pandemic peak was 33,93). The positive momentum was driven by a strong performance from the cyclical stocks (traditional companies that rely on the economic cycle to drive growth and profitability). The Russell 2000 (an index that better represents USA Mainstreet) returned 18.3% in the month reflecting the positive impact that a vaccine and a return to normality are likely to have on smaller more vulnerable companies.
Another important factor in the US was the Presidential election. Despite the election delivering almost exactly what investors had feared most, an unclear result that would take time to unpick and a split legislature (Senate controlled by Republicans) the US markets rallied 5.3% in the week following the election. Investors clearly like the idea of a return to normality which is what a Biden presidency will hopefully bring about.
One of the strongest performing industries during the month was the oil industry. Oil barrel prices rose 26.68% in the month because of increased prospect for economic recovery driven by a weak US dollar (making oil cheaper for the rest of the world) and an agreement between Russia and OPEC to delay production increases. The rally in oil and oil sticks is slightly surprising given what a Biden victory could mean for the oil industry, he has promised a return to the Paris Agreement and is expected to set incentives to transition away from a fossil fuel economy.
Whilst the equity markets have grown to new records, and economic data continues to cause a worry. New COVID infections, hospitalisations and death rates continue to soar, and there are clear signs that the economic recovery is slowing (224,000 fewer jobs were added in November than expected). At times like this, it is important to remember that equity markets do not represent Mainstreet. Listed companies are larger and less vulnerable to the shocks that an economic crisis like we have seen can cause than the SME world that the real economy is built upon.
In Europe, the EuroStoxx had the best month of all time returning 16.9% in the month, a full 2% better than the previous best-ever return of 14.9% achieved in April 2009 following the Global Financial Crisis. The key driver of this standout performance was the financial sector which made up over 16% of the index and delivered a return of 30.7% during the month.
The European market has had a tough year with Year To Date loss of 3.5% vs its American counterpart of 14.0%. Europe’s underperformance is due to its reliance on financial and industrial stocks. Alongside this, individual countries have weak balance sheets and have had trouble in launching stimulus schemes as we have seen in the US and New Zealand.
Contrary to expectations, the European Central Bank announced that it would do “whatever it takes” and announced a further €2 trillion expansion to its original €750 billion funds on the 11th.
Despite the deadline looming, Brexit negotiations continue to reach an impasse between Downing Street and Brussels, with both sides stuck in deadlock positions over trade negotiations. Although it is concerning, there seems to be confident a deal will be struck.
The Emerging Markets have had a solid run over the past 3 months delivering a 7.6% return, they have now delivered an impressive 19.1% return over the past 12 months outperforming all other regions in the world. This strong performance has been driven by early success in fighting COVID and strong Government support for the economies.
The New Zealand markets rose 5.6% in November, a muted response when compared to other global markets. The New Zealand market was held back by A2 milk which continues to struggle in the Chinese market and Fisher & Paykel Healthcare which only grew 2.6% in the month. Analysts have a mixed view on Fisher & Paykel Healthcare, the very strong NZD will reduce the value of their export earnings, and the end of COVID may see demand fall away for their core ventilator products which have been “sold out” since the pandemic started.
Two standout performers in New Zealand were Air New Zealand which rose by 28.2% and Fletcher Building which rose by 36.6%. There is increasing hope that Air NZ will be able to return to its normal operations in mid to late 2021. Controversially despite taking the Government wage subsidy earlier in 2020, Fletcher Building posted a 55% profit in its current financial year supported by increasing demand for new housing builds.