Monthly performance – October 2020

Sovereign Wealth Partners and InvestSense Pty Ltd

 

Markets

Throughout October we witnessed quite a considerable bifurcation in markets with many Asian markets (including Australia) remaining in positive territory while some European markets like France were down almost 10%. The US was down around 3% for the month after a mixed performance from dominant tech stocks. Amazon, Apple and Microsoft all fell as generally robust earnings failed to justify even more heady valuations while Facebook and Alphabet (Google) rose on strong advertising revenue. Most of the other high-profile tech stocks (Tesla, Netflix, Zoom for example) were up by double digits mid-month but ended up down 5% or more for the month.

In Australia on the other hand tech stocks like Afterpay held on to their gains (the local IT sector was up by some 8% for the month) while Consumer Staples and Banks also maintained gains of around 3%. REITs and some of the more interest rate sensitive local industrials performed the worst.

Overseas, the worst-performing sector throughout the month was Energy stocks, down 7% while oil spot prices were down by a similar amount. Meanwhile, natural gas prices jumped by 35%. Over the last 10 years, it has become quite usual for the prices of these competing energy sources to behave in an uncorrelated manner but that level of dispersion may reflect the more economically sensitive nature of Oil as well as the fact that it is generally seen as the less environmentally damaging source of fossil fuel (as well as underlying supply and demand dynamics).

Gold was flat throughout the month, which was perhaps strange given that hopes and concerns over fiscal largesse under a Biden government that has apparently bolstered and undermined equities and bonds, respectively. Agricultural commodities and industrial metals both sold off in the last week of the month but remained in positive territory overall.

 

 

Looking Forward

Up until the last few days, investors were faced with evaluating a wide range of outcomes with a bias towards scenarios that involved considerable fiscal stimulus in the US and difficult to perceive eventual impacts on long-term bond rates. With the US election now (apparently) decided but more importantly the US Senate remaining under Republican control at least for 2 months and probably 2 years the implications for capital markets have become somewhat clearer.

Long-term not much has changed except that the onus will be more on fiscal responses to economic malaise than immediate monetary ‘printing of money’. In Australia, one might have assumed the opposite was true with our central bank starting its own monetary quantitative easing program but in reality, US liquidity flows will probably continue to dominate our interest rate and lending markets.

In the shorter-term, that means we remain underweight government bonds over corporate credit and cautiously long (in line with strategic benchmarks) while we monitor the ongoing tension between a slowing global economy and promises of a step-up in government spending.

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