While the US election dominated our news coverage and was significant for geopolitics and its implications for the global economy, the December quarter was still a story of the evolution of the coronavirus and its impact on our way of life.
The announcement in early November of the Pfizer vaccine’s efficacy (and related approvals) closely followed by similar announcements for the Moderna and Oxford-Astra Zeneca Covid-19 vaccines, buoyed financial markets. This spurred a risk-on sentiment, allowing equity markets to rally hard. The Australian and US markets leapt over 10% in just one month (November) after mostly negative return for the previous month. The rally continued in December (Australia +1%, international equities +3-4%), leaving equities to record double digit returns for the quarter.
Annual performance numbers for different asset classes told another story, with Australian Equities only returning 1.4% for the calendar year, seriously underperforming the tech heavy S&P500.
Safe haven investments such as cash, bonds, and gold recorded negative returns, as investors sold these assets in favour of growth and risk with all but the high yielding Australian bonds recording poor 12 month returns.
The US dollar continued to buckle under the weight of increased US debt issuance which is being used to fund government stimulus spending as well as the ballooning current account deficit. The twin deficits are now 18% of US GDP –which is the largest on record. Ordinarily interest rates would have to rise to compensate investors for the risk (like they have historically in Mexico,Turkey, Argentina etc), but these are less than ordinary times, with the US Federal Reserve effectively providing a backstop by buying these bonds and keeping interest rates low.
Low interest rates and huge government stimulus create their own problems. Globally, nearly 26% of the world’s investment grade debt (now around $17 trillion US) attract a negative interest rate. This included the Australian Government’s first sale of negatively yielding bonds.