CHRIS BURRELL ’ S BLOG
Towards a New Normal
This blog is written following three material events in the past week :
1 ) USA November 2020 elections 2 ) Reserve Bank of Australia ( RBA ) Melbourne Cup Day Bulletin 3 ) Positive Vaccine Report
RE 1 , the weekend saw President Elect Biden recognized as the incoming president with an impressive speech to mark the occasion .
However , the Democratic party have lost members in Congress . Initially it appeared that the outcome would be nirvana for the markets from an investment perspective with an ideal check and balance as the Republicans appear to have held the Senate . The probability is that the Senate is likely to remain under Republican control . This is consistent with the US electorate wanting checks and balances . For the market , the most important factor is that the Senate is able to ameliorate the left wing extremes of the Democrats . There is now some uncertainty , as two Senate positions in Georgia require special runoff elections in January . The Vice President has a casting vote so that if the Senate were to be tied at 50 all , Vice President elect Kamala Harris would have the deciding vote .
The filibuster rules in the Senate are complicated , but require 60 senators to vote as a matter of course to stop debate on a matter . However , this does not apply to all matters . Important exceptions include confirmation of presidential nominees and budget procedures , which are covered by separate legislation . After a relief rally , the US market may show some volatility ahead of the Georgia Senate run offs in January .
RE 2 , RBA decided an interest rate of 0.1 % for 1 and 3 years , with bond buying to keep the 10-year rate down . Of concern , the RBA announced that it saw no increases in interest rates for 3 years as it was sticking to the view that there would be no rate rise until inflation exceeded the 2 % benchmark . The RBA adopted inflation as the only relevant variable for monetary policy , with no concern as to the effect on retirees and savers or bubble effects on asset markets . There is a body of opinion that suggest a new monetary paradigm is required which looks at more than inflation .
Of greater concern is that the RBA is responding to a one off health event as if it is a systematic problem . Vaccine breakthroughs may leave the RBA with too inflexible policy settings .
RE 3 , the Pfizer announcement of a 90 % efficacy for the phase III trial of the COVID-19 vaccine utilising the new m- RNA technology is a COVID game changer . The report of an initial shot + a booster providing at least 12 months protection should see COVID brought under control in calendar 2021 . Globally markets will look for return to the “ new normal ” in calendar 2021 . Pricing will revert to a health event rather than a systematic mark down .
Asset Classes
Fixed interest Term deposit rates are now under 0.5 % p . a . as compared to 6 % during the Global Financial Crisis . The conundrum for investors is that the returns from TD ’ s are abysmal , partly as a result of the RBA flooding the banking system with liquidity and the government achieving the same outcome with its various COVID stimulus measures . Investors should further evaluate the asset allocation to term deposits within the fixed interest asset class . Other alternatives such as senior debt and hybrids have superior risk-adjusted margins . Hybrids come with higher interest rates , often plus 3-4 % over the 90 day bill rate , but those that are market listed have shown volatility which correlates with the underlying issuers , particularly bank shares prices during COVID and other negative periods .
With other asset classes more attractive , investors should consider reducing the asset allocation to fixed interest within the range in favor of property and equities .
Property Property trusts are trading at less than net assets , as compared to pre-COVID when they were generally trading at premiums to net assets . This is a limited window as property trusts have appreciated in recent months from the COVID lows . The downward adjustments in office trust prices as a result of COVID appears overdone , with businesses requiring more space in a COVID world to house employees , offset by some working from home . Businesses which need to train graduates and other staff , together with those such as our own business which required daily collaboration during COVID and ongoing , are unlikely to adopt a home base model . A successful vaccine ( s ) will expedite a return to a “ new normal ” in Australia ’ s cities and their office markets .
Australian Equities The low fixed interest rates mean the TINA ( there is no alternative ) effect is likely to be seen , dispersed with the corrections in response to negative issues such as earnings reports below expectations or adverse geopolitical events .
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