Markets were remarkably strong in November with the ASX 200 rising 10.2% and International markets up 7.4% as represented by the MSCI World Index in Australian Dollars.

The recent strong run may mean we are in for a period of consolidation, though not necessarily a material pull-back. We still see plenty of supportive factors for markets in the near term, including:
  1. Vaccine means a resolution to the impact of Covid is on the horizon
  2. High case numbers, concerns on the economy and uncertainty on the roll-out of vaccines mean policy makers remain in the mindset of “whatever it takes”. Fiscal and monetary stimulus remains in place as a result.
  3. The Democrat win in the US — with Congress likely divided — means the end of the unpredictability of the Trump Administration, but lower chance of a dramatic new policy agenda.
  4. China’s economy continues to outperform the rest of the world. Positive interest rates are attracting capital which supports the RMB and Chinese spending power. This is good for commodities.
  5. Australia is in the sweet spot of summer + Covid suppression + a potential vaccine before winter. This provides a reasonably clear path for the economy.
  6. A Brexit deal possibly ends some uncertainty in Europe.
  7. In the market, low rates continue to support growth stocks, which are holding up well. Value stocks are benefiting from accelerating growth and greater earnings certainty all supported by substantial liquidity. This means the current rally has decent breadth.
Australian Economic Activity Tracker is continuing to edge up, consistent with the control of coronavirus in Australia and the reopening of the economy, notably in Victoria, but also with relaxing distancing requirements in other states and border re-openings. In fact, it’s now down just 4.5% from a year ago, which is a huge improvement from being down 58% at its low point in April. This all suggests that Australia will see continuing solid economic recovery this quarter, while the US may be slower, and Europe will see a contraction. All things being equal, this should be relatively positive for the Australian share market and the A$.
Based on weekly data for e.g. job ads, restaurant bookings, confidence, mobility, credit & debit card transactions, retail foot traffic, hotel bookings. Source: AMP Capital.
US data was mixed, with strong business conditions ISM readings for November, a strong rise in construction and solid home sales, but slower than expected jobs growth, with payrolls up by just 245,000 in November. 56% of jobs lost earlier this year have now been reinstated and unemployment has fallen back to 6.7%, but the slowing pace of the jobs recovery is likely to be a warning that the economic recovery may be starting to fade in the face of rising new coronavirus cases and more state or city lockdowns. This in turn is increasing pressure and hence prospects for more fiscal stimulus and for the US Federal Reserve (Fed) to strengthen its quantitative easing program.
Shares could see a short term pause after recent strong gains. We are now however into a seasonally strong period of the year for shares (particularly from mid-December) and on a 6 to 12-month view, shares are expected to see good total returns on the back of ultra-low interest rates and a strong pick-up in economic activity helped by stimulus and likely vaccines.
Low starting-point yields are likely to result in low returns from bonds as the dust settles from coronavirus.
Unlisted commercial property and infrastructure are ultimately likely to benefit from a resumption of the search for yield, but the hit to economic activity (and hence rents) from the virus, will weigh heavily on near term returns.
Australian home prices are being boosted by ever lower interest rates, government home buyer incentives, income support measures and bank payment holidays but high unemployment, a stop to immigration and weak rental markets will likely weigh on inner city areas and units in Melbourne and Sydney into next year. Outer suburbs, houses, smaller cities and regional areas are in much better shape and will likely see stronger gains in 2021.
Cash and bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.10%.

Source:   AMP Capital. Pendal Group.
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