Good news extends stocks’ remarkable run

A spate of good news has added to an extraordinary run in the Australian sharemarket.

A spate of good news has added to an extraordinary run in the Australian sharemarket. Photographer: Michael Nagle/Bloomberg

A spate of good news has added to an extraordinary run in the Australian sharemarket.

Just when it seemed shares might dip amid stretched valuations after strong gains since the US election and positive test results for coronavirus vaccines this month, very encouraging results from the AstraZeneca-Oxford vaccine phase three trial combined with reports that US president-elect Joe Biden planned to nominate former Federal Reserve chair Janet Yellen for Treasury Secretary to give markets a further boost.

Domestically, the scramble for shares — particularly those linked to the local economy — was magnified by the welcome news that the NSW-Queensland border will fully reopen on December 1.

The energy sector was strongest on the prospect of increased fuel consumption globally once COVID-19 is brought under control, and there was a further rush for travel-related stocks such as Qantas, but financials were among the standouts as the market anticipated higher bond yields.

After surging as much as 1.5 per cent to a fresh nine-month high of 6661.4 points intraday, Australia’s S&P/ASX 200 share index closed up 1.3 per cent at 6644.1, adding $26bn of value.

With a 1.6 per cent gain so far this week, the S&P/ASX 200 was on track for its best month since inception in 2000 after a remarkable 12.1 per cent for the month to date.

An 11.8 per cent rise in the longstanding All Ordinaries index leaves it on track for its best month since March 1988, the month that market finally shook off the initial panic of the 1987 Crash.

Looking ahead, short-term risks to the market from month-end rebalancing by balanced funds remain. After such strong gains and with the VIX volatility index near the low end of its post-COVID-19 range, the US sharemarket may need a further procession of good news to avoid a retreat.

Logistical obstacles to a rapid deployment of much-needed US fiscal stimulus and coronavirus vaccines could see a renewed economic downturn in the US, potentially magnified by the spread of the virus over Thanksgiving — similar to the spread of COVID-19 in China during Lunar New Year.

But the Australian market is differentiated by a very low incidence of COVID-19 and related restrictions on movement, as well as the nation’s world-leading fiscal stimulus and its greater weighing to value stocks that will benefit from faster economic growth.

Bell Potter head of institutional sales and trading Richard Coppleson noted that after rising on large volumes on Tuesday, the All Ordinaries was heading for its best November since 1917 — 103 years ago.

Looking at the 10 biggest November rises in history, he found that the next month was always up, by an average of 2.7 per cent, and in four of the biggest November rises in history, the subsequent gain in December ranged between 3.6 and 6.3 per cent.

BlackRock strategists upgraded US equities to “overweight” on Tuesday.

“We prefer to look through any near-term market volatility as COVID-19 cases surge,” they said.

“Positive vaccine news reinforces our outlook for an accelerated restart during 2021, reducing risks of permanent economic scarring.”

Their “barbell” strategy includes allocations on one side to quality companies benefiting from structural growth trends and on the other to selected cyclical exposures.

“This can help achieve greater portfolio resilience amid still high levels of uncertainty about vaccine deployment and the prospects for further pandemic relief,” BlackRock strategists argued.

“Our tactical upgrade to US equities and long-held preference for the quality factor are how we choose to gain exposure to structural growth.”

A key risk to their view lies with overall US policy support, especially early fiscal relief, highlighted by the winding down of key Fed/Treasury emergency support facilities by the Treasury.

Thus while they see vaccine developments providing a constructive backdrop for risk assets, their preference is for quality companies that can outperform even if fiscal support is disappointing, as well as cyclical exposures that should thrive as the timeline for widespread vaccine deployment advances.

BlackRock advocates a selective approach to cyclical exposures, with overweights in emerging markets, Asia ex-Japan equities and the US “size factor”, which tilts toward mid- and small-cap companies.

Emerging markets should benefit from a global cyclical upswing in 2021 as well as more predictable US trade policies under president-elect Joe Biden, while the size factor is geared to a US cyclical upswing.

BlackRock also cut European equities to underweight and remained underweight Japanese shares.

Europe has a lot of exposure to financials struggling with low rates, while Japan may not benefit as much as the rest of Asia from a cyclical upswing, and could see its currency driven up by a weaker dollar — from monetary easing and more stable trade policy under a Biden administration.

A shift from growth to value stocks will have implications for global fund managers.

Morgan Stanley’s Andrei Stadnik warns that the value rotation is a risk to Magellan’s flows and trading multiples and that its strategies have seen negative returns on the value rotation.

“We think retail flows should remain resilient given Magellan’s strong brand and distribution, but we see redemption risks in institutional,” he said.

“We think these risks are not in the price with the stock on about 25 times and reiterate our ‘underweight’ rating.”