Weekly Wrap 23 October

Jessica Amir
October 23, 2020

In just one week the Aussie share market hit a seven-month high, whilst also hitting an eight-day low. It seems this pendulum of volatility is a reaction to the impending U.S. election in ten days. The technical viewpoint indicates there is upside to come.

In this week’s wrap, Jessica covers:

  • (1:05) Investors rotating out of defensive sectors and into cyclicals
  • (1:19) Pro Medicus (ASX:PME) jumping 14%, while Megaport (ASX:MP1) sinks 9%
  • (2:07) The pre-election cash build up: what you need to know
  • (3:02) What the markets tell us about the U.S. election
  • (5:05) Three trading ideas in IT, Education & Property
Read Transcript

Thanks for your company this Friday the 23rd of October for the weekly wrap up, I’m Jessica Amir, market analyst with Bell Direct. Well what a week the Aussie share market hit a new 7-month high on Monday then swung to its lowest point in 8 days on Thursday before clocking a 0.1% loss Monday to Thursday. Overall trading conditions have been soft this week with the ASX200 falling for the first time in 4 weeks as investors exercise caution before the U.S. election in almost 10 days. On the positive side the Aussie share market is still in a technical breakout with the ASX200 trading above its 250-day averages indicating there could technically be more upside. Now this notion is supported by global central banks and governments pumping money into their economies to aid in the recovery plus most experts think that a vaccine will be widely available mid-2021 so the market is beginning to price this in. Only a handful of sectors closed in the black this week as investors rotated out of defensive sectors selling out of Utilities, Telcos and Consumer Staples while they instead invested into cyclicals like tech, industrials, materials and financials. Healthcare software company Pro Medicus (ASX:PME) gained the most 14%. PME didn’t make any announcements but its share price momentum pushed its shares to their highest level in about a year. Megaport (ASX:MP1) went the other way falling about 9% after their reported weaker than expected European data but business-wide record performance with customers up 7% and ports up 10%. All in all MP1 shares hold a 38% year-to-date gain. UBS upgraded Megaport this week expecting strength in the second half of this financial year as it’s entered into a collaboration with Cisco and North American customers are up 63%. Now in terms of the two big themes to consider over the next few weeks, the first is that the U.S. election is upon us. U.S. stimulus is up in the air though but regardless of who wins fresh stimulus is expected to be rolled out to support the U.S. economic recovery. What’s more noteworthy is what happens in the lead up and post the election we know COVID-19 has exponentially increased uncertainty and cash balances in 2020 but according to BlackRock since 1993 trends have shown that global investors increase their cash in the year of an election anticipating volatility. Australia’s future fund is no different its cash has increased from 11% or $18.96 billion to 19% or $31.18 billion in a year and the fund slightly reduced its Aussie equity exposure from 36% to 32%. So honing in on the election we know economic health and stock market performance can often be an indicator of who could win, now there are a couple of considerations with this in mind over the last 100 years every President who averted a recession was re-elected except one, Calvin Coolidge and since 1984 if the S&P500 was positive in the three months ahead of an election which it has been, now then there was a 100 success rate of the in party winning the election, if the index was negative the president in power lost the election. We also know volatility peaks around elections and given that there will be a lot of postal votes consider that we might not have a clear result on November 4 so volatility is likely to extend beyond election day and another consideration is that returns historically differ depending on who’s in power, since 1933 the best S&P500 returns occur with a democratic president, senate and republican house with returns of 13.6% per year so to get this all three seats will need to be reversed but if Trump is re-elected with the current mix, a republican president of course, republican senate and democratic house then returns average 10.8% per annum and if Biden wins things are a little unknown so there’s some considerations there. Now the second major consideration is that long-term investing success relies on economic growth, interest rates, productivity, innovation and your stock picking success. Now with that in mind Morgan Stanley, Citi and BlackRock expect cash to come off the sidelines and return to stocks given valuations appear attractive and COVID-19 related uncertainty is abating. So with that in focus let’s end on some trading ideas in the tech space, Morgan Stanley increased Afterpay’s (ASX:APT) buy rating in price target this week to $115 on stronger app downloads in the U.S. on its global platform expanding and on expectations of a surge in sales and customer activity in the December quarter. In the online education sector Morgan Stanley reiterated IDP (ASX:IEL) as their code as an overweight or buy with a $24 target given IDP’s profitability remains strong and FY21 appears to be on track. And lastly with COVID-19 restrictions easing, Dexus (ASX:DXS) was upgraded by Credit Suisse and UBS as a buy with a $9.92 and $10.59 respective targets after Dexus handed down better than expected performance and a bolstered outlook for the property sector. So that’s it plenty of ideas to consider from all of us here at Bell Direct, have a happy and safe weekend, thanks for your company, bye for now.

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