Global share markets rose again in December, although not quite as readily as in November, as strong economic fundamentals and continued optimism concerning the control of COVID-19 buoyed sentiment. The US market outperformed other major markets, rising by close to 4%, however a strong Australian dollar led to a negative month for international shares overall. The local share market gained a respectable 1.2%, with the IT sector gaining more than 9%, while safe-haven assets like bonds weakened.
The share market recovery which began in the second quarter of 2020 continued last month, and so did the weakness in the US dollar (USD) which can be seen in the graph below. Assets like the US dollar tend to be in demand in times of uncertainty pushing the index up, but as fear and uncertainty subside demand for the USD tends to decline.
The continuation of both the share market recovery and weakness in the USD point to optimism that some combination of the three COVID-19 vaccines will bring the virus under control globally in the not too distant future. The Australian dollar on the other hand outperformed major currencies, gaining more than 4% and finishing close to 77 US cents.
Many investors had been sceptical about whether a US stimulus package could be agreed by the Republicans and Democrats. As such, the passing of a nearly $900 billion USD package in December provided a tailwind as the year came to an end. Among the measures included in the package were $600 USD payments for individuals (which are reduced for higher income earners), as well as support for businesses. These measures may be helpful in jump-starting the economy, but with unemployment still over 6% (although down considerably from the middle of 2020), the risk is that too many payments will be saved rather than spent.
The path towards further US stimulus may be much simpler under a Biden administration, as the Democratic Party secured two Senate seat wins in early January 2021, giving them control of both the House of Representatives (as is currently the case) and the Senate. This control means passing new legislation should be considerably easier for the Biden administration, which will surely be welcomed by investors in the case of further stimulus packages. On the other hand, the prospect of higher corporate taxes under the Biden administration also becomes more likely, but for the time being, the resilience of global equity markets indicates that investors aren’t too concerned just yet.
The US economy has continued to perform well, with the fall in unemployment being accompanied by an increase in manufacturing activity to a rate not seen since 2018.
December also saw Europe move closer to a €750 billion stimulus package, part of a €1.8 trillion budget for the period from 2021 to 2027. Hungary and Poland had previously blocked the legislation due to the inclusion of certain provisions, and although the legislation can now move forward it must still be ratified by the parliaments of all 27 member states. In the interim however, investors welcomed the news that the European Central Bank had decided to increase the scale of its intervention in fixed income markets to the tune of €500 billion, bringing the total size of the pandemic emergency purchase programme to €1.85 trillion. With historically low rates expected to continue throughout 2021, the European Central Bank is hoping that increasing the emergency purchase program for a second time will reduce the short term impact of the continuing pandemic whilst also speed up the economic recovery as the vaccine is rolled out.
Due to the turmoil of 2020, one would be excused for being surprised that share markets delivered a positive return over the year. While we certainly welcome the strength in share markets over the last three quarters, risks still remain as the pandemic continues to force lockdowns across the globe and the roll out of the vaccines will take time to show its effectiveness. On a 12 month outlook though, share markets look relatively positive, especially when compared to bonds and cash, but a diversified approach to investing remains key to spreading risks whilst also participating in the upside from markets. We remain cautiously optimistic for 2021 and look forward to a return to normalcy both locally and overseas in the not too distant future.
1 Bloomberg Finance L.P
2 Bloomberg Finance L.P, EISS Super
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