Marcus Today SMA | October 2020 Update
BREAKING NEWS: Light at the End of the Tunnel.
Big vaccine developments just before we hit the send button. A brief summary:
Stocks around the globe rallied after German-based BioNTech and Pfizer announced that their COVID-19 vaccine candidate achieved success in the first interim analysis of a Phase 3 study. The company said that the analysis found that the vaccine was more than 90% effective in preventing the disease among trial volunteers who had no evidence of prior coronavirus infection. If these results can be replicated moving forward, that level of protection would put it on par with highly effective childhood vaccines for diseases such as measles. No serious safety concerns were recorded. The next part of the process will see Pfizer applying to the FDA for emergency authorisation of the two-dose vaccine later this month, after it has collected the required two months of safety data. By the end of the year, it will potentially have manufactured enough doses to immunize 15-20m people.
On the news a significant sector rotation began in equity markets, out of covid beneficiaries (technology, online specialty retailing, defensive stocks) into cyclical recovery and value stocks (travel, tourism, financials, resources, media, aged care, REITs).
Cyclical sectors surged on the vaccine news, whilst tech names were left behind amid the potential end to the stay-at-home and online shopping themes. The vaccine couldn’t come at a better time as the US case count reached nearly 10m and as the US election saw a new attention to the virus spread, with Joe Biden unveiling his COVID-19 task force.
US treasuries sold off sharply (bond yields rose) and a switch from bonds to equities began. The US dollar was stronger against its major peers, particularly vs yen. Gold fell 5% in its worst session since Jun-13. Oil jumped 8.5% in it’s best session since mid-May. Base metals mainly stronger on the news and Iron ore rose 3.3%.
MARCUS TODAY GROWTH SMA (MT0001)
The Marcus Today Growth SMA fell 1.32% in October, underperforming the 1.89% rise in the benchmark S&P/ASX 300 Accumulation index by 3.21%. The Growth SMA has risen 4.05% over the past 12 months – outperforming the 7.91% fall in the benchmark index by 11.96% for the period – and is up 7.2% in the first nine days of November, against the benchmark index up 6.36%.
Through October and the early stages of November we made the steady transition from a cash weighting of around 30%, to now be fully invested. Through this period we increased our tech exposure in the liked of ALU, APX, TNE and XRO, and added specific stocks that we saw would be beneficiaries of a “return to normal” in Australia, including OML and JIN.
We continue to hold none of the ‘big four’ banks. While we are not fixed to that position, we believe we will be able to significantly outperform the banks through stock and sector selection, even as the economic outlook improves. We have maintained a relatively heavy weighting in the travel space (currently around 10% of the portfolio through exposure to CTD, FLT, QAN, SYD and WEB) which is holding us in good stead as the market jumps on the Pfizer vaccine news.
In response to the news we have further raised our travel exposure, as well as reintroduced energy exposure through OSH, ORG, WPL and STO, and topped up our holdings in BHP, RIO, MQG and SCG. To fund these purchases, we have sold ‘covid beneficiaries’ PMV, NCM, NST, WES, WOW, COL and FPH.
MARCUS TODAY EQUITY INCOME SMA (MT0002)
The Marcus Today Equity Income SMA fell 1.74% in October, underperforming the benchmark ASX 200 Industrials TR index which rose 2.76% for the month. The Equity Income SMA has a 12 month gross yield of 5.02%, which sits above the market average yield of around 3.5%.
October was a big transition month for the Income SMA. We made the move from 66% cash at the start of the month, to now be fully invested. If some yields look a bit skinny most of them return to paying higher dividends next year.
You’ll notice we have significantly increased the spread of holdings by number, there are no stocks with market capitalisations below $500m, and there is a large weighting to top 50 stocks. This is a deliberate attempt to reduce volatility and risk. This also means that this is not a growth portfolio. It lacks healthcare exposure and technology exposure. On that basis, it will be hard to outperform the ASX 300, but that’s not the goal, the goal is to provide an income with reduced capital risk. Our benchmark should be to beat the total return of term deposits, but it isn’t, but I can see why some fund managers use the RBA cash rate as a benchmark for their performance bonus…cheeky, but you can see why if chasing income corrals you into low growth stocks.
In response to the vaccine news we have further raised our travel exposure by topping up SYD and QAN, as well as reintroduced energy exposure through ORG, WPL and STO and banking exposure through ANZ, NAB and WBC. We have also increased our holdings in BHP and MQG. To fund these purchases, we have sold ‘covid beneficiaries’ AX1, JBH and NCK, while also decreasing out exposure to WES, WOW and COL.
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OCTOBER MARKET COMMENTARY
October saw the ASX 200 rise 1.92%, outperforming the majority of global markets in a month dominated by the ‘winter wave’ of COVID-19 across Europe and the US.
Also taking centre stage this month was the build-up to the American presidential election. European markets all finished the month well in the red as COVID-19 continued to suffocate economies and livelihoods.
Germany was the worst hit, down 9.44% in October, followed by the FTSE down 4.92%, Italy down 3.94% and Spain down 3.75%.
The Dow Jones fell 4.61% for the month, while the S&P 500 and the Nasdaq fell 2.77% and 2.29% respectively as an exponential “Winter Wave”of COVID-19 cases in the northern hemisphere led to the reintroduction of lockdowns. The UK went into an Australian style lockdown for one month from November to December.
The US election didn’t quite end up with the ‘blue wave’ (a Democrat sweep of Congress and the Senate) that many expected, and there is still some election uncertainty as Trump fails to concede and instead instigates legal challenges and accusations of fraud. The media went cartoon mad:
Despite that the markets are now assuming that Joe Biden has won the election race and is set to become the 46th President of the United States of America, with Vice President-elect Kamala Harris the first woman, the first person of colour, and the first person of Indian descent to take the role.
Early polls on election day saw Trump in a strong position, labelled the “Red Mirage”, which was, as many predicted, overcome by the “Blue Wave” of mail-in voters in the battlefield states of Michigan, Wisconsin, and finally Pennsylvania which saw the democrats over the line.
We will have to wait until January 5th for clarity on the Senate, with run-off elections set for the Georgia seats.
The markets responded well to the election result. On November 4th and 5th the Nasdaq was up 7.08%, the S&P 500 up 4.19% and the ASX 200 up 2.11. The driver for the strong equity market response was not the end of the Trump era (a tremendous relief to many investors), but the failure of the Democrats to make a clean sweep of the Senate. That means four years of political impasse which blocks any major policy changes such as market threatening tax hikes, anti-trust laws (targeted at Big Tech) or Medicare changes (which would have dented listed healthcare earnings). The net result is that Wall Street is looking forward to four years of getting on with it without political interference.
Of course the political stalemate could also hold up that $5-7 trillion stimulus package that a democratic Blue Wave might have delivered, and the market was hoping for, but before we despair for that, there is just a chance that in a world without Trump, a political unity/sanity returns and the political machine starts to work together. The political dysfunction, antagonism and divide pre-election is surely as bad as it gets.
Assuming the transition to power is ultimately smooth(ish) and the Republicans hold the Senate, here is some of what we can expect the election outcome and a Biden-Harris led America:
- Executive orders to re-join the Paris climate accord, reverse withdrawal from WHO, repeal Muslim travel ban and reinstate the Dreamers program.
- A new 12-member coronavirus task force.
- A return to coronavirus restrictions but with a goal to minimize the kind of economic damage caused by the first lockdown measures.
- A stable message on beating the virus from leaders at all levels and sides.
- A deficit-financed economic recovery bill sent to Congress.
- Delayed progress and roadblocks on the tax-increase plans.
- Expansion of Obamacare in the face of split congress making a public health option difficult.
- A different approach to trade. Biden is expected to be more open to deals but could also be more effective in pressuring China by galvanizing allies.
- No trade deals until after coronavirus stimulus and infrastructure investments.
- Strength in tech and healthcare thanks to the split senate.
- Decreased volatility caused by a drop off in Presidential tweeting.
- A last-ditch effort from Trump to make life difficult for Biden over his last two months in office – may include the firing or targeting of perceived enemies and the pardoning of controversial allies.
Meanwhile, the virus continues to spiral out of control around the world. 30 of America’s 50 states hit new case number records over the first week of November as the global case count passed 50m. Global numbers have risen by an average of 540,000 a day over the last week and a quarter of the total cases have come in the last 30 days as the virus goes exponential and uncontrolled. They need a vaccine because the spread of the virus appears to have reached the point of no return – there is no coming back from this without a significant and devastating lock down or a vaccine. If Pfizer is right, the world may have one.
Charts of the coronavirus spread:
Deaths following in a nasty way.
It all makes you pretty happy to be Australian. As we write we have had almost two weeks of no locally transmitted cases in the country, and Victoria has turned golden child with 10 straight days of no new cases and restrictions easing. Plus the NSW/VIC border sis et to open up on November 23rd.
ALSO IN OCTOBER:
- AGM season kicked off in typical fashion with a split of confessions and upgrades. Companies are making plans for a permanent switch to virtual AGM’s after having their hand forced this year. Retiree investors that used to attend major company AGMs for the tea and cakes, will go hungry.
- Volatility is coming down as the US election result injects certainty. A president that doesn’t tweet every thought takes away a significant market risk. The VIX volatility index is back to 20 from 80 but is still sitting well above the long-term average.
- The RBA reduced the cash rate by 0.15% to 0.10% at the November meeting on Melbourne Cup day and announced it will purchase of $100 billion of government bonds of maturities of around 5 to 10 years over the next six months. Estatye agents broke out the champagne.
- A pretty routine FOMC meeting (US Federal Reserve meeting) did not mention the election, but pledged once again to do whatever they can and use their “full range of tools” to support and sustain the US economic recovery.
- Since a Biden win became likely, both US 10-year bond yields and the US dollar have dropped (meaning the AUD has risen) on fading hopes of stimulus, the prospect of a long “lame-duck” period without a clear winner (bad for business confidence), and the chances of a more serious approach to virus (lockdowns).
- The Australian Government showed their hand with “Maximum Stimulus” as they announced the Federal budget. Infrastructure capex, housing construction, jobs market stimulus, household income stimulus (which will perpetuate the online retail boom), tax incentives, are all being factored in.
- RBC Capital Markets joined Westpac in upgrading Australian GDP forecasts post the budget.
- A record 33.1% jump in Q3 US GDP, up from the 31.4% fall in the second quarter, is what $3 trillion worth of stimulus buys you. Most of the rebound came from “personal spending” which surged thanks to government stimulus cheques and unemployment benefits from the federal CARES Act.
- Vaccine news through the month included Fauci saying the US is in a “Bad Position”, there will be no vaccine until January at the earliest (two more months of exponential case growth), and that things are unlikely to get back to normal until 2022. The vaccine announcement from Pfizer was described by Fauci as extraordinary.
- Australia signed a vaccine deal with Pfizer shortly before their trial results became public. The suggestion is that Australia could receive vaccines for aged care and essential workers by March 2021.
- Most of the S&P 500 reported Q3 numbers. Of them, 89% saw a positive earnings surprise and 79% reported a positive earnings surprise. If the numbers stay as they are, this will mark the highest level of ‘earnings surprise’ since the metric was first tracked by Factset in 2008.
- Gold spent the month treading water, finishing 0.4% lower despite the continued stimulus and political uncertainty.
- The oil price fell 11% in October as a rampaging virus further dulled the global growth outlook. Since the election in early November and on the recent vaccine news the oil price has bounced 18.06% in two weeks.
- The banks rose through the start of the month, but ultimately dropped back down off the top of its trading range on the back of some uninspiring results from the ‘Big 4’. Post the vaccine news the bank sector has popped 11.1% on hopes for higher interest rates which expend margins and may accelerate the return to higher payout ratios. Payout ratios used to be 95% before APRA stepped in after the outbreak of COVID-19. They are currently 45-50%.
- The iron ore price continued to come off the top. BHP and RIO fell with it.
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