Australian Equities followed on from a stellar November, with a December gain of 1.21% to lift the calendar year 2020 into positive territory with 1.40% return including dividends.
Although stock markets around the world also continued their upward path, the strong gains in the Australian dollar meant the MSCI World Index in AUD terms lost 0.43% for the month.
The AUD rallied from $0.7341 to $0.7690 a gain of 4.75% fully offsetting the gain in the S&P500 index of 3.7%.
The rising Australian dollar continues an ongoing headwind against the returns for international assets. One of the benefits of holding international assets is that in a crisis situation, money tends to flood into US Dollars and out of the currencies of commodity producing countries like ours. This provided a cushion during the months of February and March but has dragged on returns since then.
Within the fixed income markets, the continued optimism about an economic recovery saw longer term bond yields on the rise. The US Ten year bond yield rose from 0.84% to 0.93% during December. In Australia ten bond government bond yields rose from 0.92% to 0.98%.
In bond portfolios with long maturity durations this creates a capital loss. Within Australian fixed interest, the loss was -0.27%. In Global fixed interest, hedged back into Australian dollars the return was positive thanks to continued narrowing in credit spreads. The gap in yield (credit spread) between a portfolio of high grade us corporate bonds, and government bonds of similar maturity narrowed from 1.12% to 1.03% during the month of December.
Listed property continued to improve both locally and overseas, aided by the hopes for a return to work and shopping sometime in 2021.
As we noted last month, there does appear to be an ongoing rotation into cyclical ‘Value’ stocks. As an example the Russell 1000 Value index (IWD) has outperformed the Russell 1000 Growth index (IWF) by 5.38% since the Pfizer vaccine announcement.
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