Economies & Markets in a Post Covid-19 World
Below, please find attached a piece written by Evergreen, our investment consultants, giving a broad market and economic update and a message to stay the course.
The shock to economies from the outbreak of coronavirus has been felt
world-wide. So far, China and Europe have been the worst affected, while
Australia has been partly shielded by its commodity exports. Most of the world
will feel the main impacts during the current June quarter, which saw many
economies in lockdown. Markets, on the other hand, have recovered much of their
losses and are anticipating a strong economic recovery. Indeed, the recovery is
already underway as restrictions are gradually being lifted in even the
hardest-hit places.
Exhibit 1: Comparative March quarter growth outcomes (source – adapted from Fidelity)
If March quarter growth were a competition, Australia won gold
We live in extraordinary times. If an economist was to awake from a deep coma and analyse the latest March quarter GDP figures from around the globe they would think that the world was at war, or had perhaps been struck by a comet.
An economic contraction of a few percent would normally take a year or so to develop, let alone a single quarter. But that is exactly what took place at the global level in the first few months of 2020 as the world was ravaged by a new virus for which there is no natural immunity.
China took the hardest hit in the March quarter, as can be clearly seen in Exhibit 1. This is because China is ground zero for the virus and it began to close down its economy much earlier in the quarter than the rest of the world. For Australia – a country that had already been ravaged by unprecedented bushfires – the relatively slight contraction in GDP seems almost miraculous.
How did this happen?
In the first instance, Australia benefited from being an island nation, which allowed it to more successfully control its borders (aside from the Ruby Princess cruise ship debacle where passengers were allowed to disembark prior to receiving virus test results). The government placed travel prohibitions on badly affected nations and was prepared to wear the political fallout at home and abroad from banning high-risk groups, including lucrative foreign students.
Australia quickly implemented social distancing measures and regularly prepared the nation to expect further restrictions. It also provided hope by doubling the JobSeeker allowance and implementing the JobKeeper scheme, along with various other measures. This meant that many whose income would be severely affected could at least plan for the near term when it came to important spending decisions.
But, the main driver behind Australia’s impressive GDP outcome was its ability to increase commodity exports, based on China’s slow re-emergence. The increase in net exports completely offset the decline in consumption and investment. If not for the rundown in inventories and a small error term that often occurs in GDP calculations, Australia would have finished the quarter flat!
Where to from here?
While growth in the current June quarter will be deeply negative for virtually all nations except China, markets are forward-looking and have optimistically factored in a strong recovery. This looks to already be happening as restrictions are peeled away in many parts of the world.
In fact, global stock markets have recovered much of their losses in what has been a stunning rebound. Developed nations have passed the worst of the first wave of the virus and now less-developed countries are under attack, such as India and Brazil.
So why have markets been so quick to recover? At this stage, investors have determined that this is an event crisis (as opposed to a financial crisis, such as the GFC) and history has often pointed to a faster rebound in these instances. Markets have been able to take solace from co-ordinated fiscal and monetary stimulus that is at levels usually reserved for times of war.
This means that interest rates will remain low for a very long time, which has a dual impact. Firstly, it reduces the cost of borrowing for consumers and investors, and secondly, it boosts the valuations of assets such as shares. It also means that the property market is likely to avoid the worst of the imagined falls and this will boost confidence among existing and future property owners. It also helps to avoid a devastating negative wealth spiral.
A potential threat to longer term growth in property values is the likely reduction in immigration levels, particularly if unemployment were to remain high. As population growth slows, so too does household formation and the need to dramatically increase the housing stock. The federal government has announced some means-tested subsidies in this space to help to counter this effect.
The global supply dislocation that became evident during March and April will encourage many nations to restore parts of their manufacturing sectors, to help to circumvent similar events in the future. This will provide an important boost to many economies where there is currently an excess supply of lower-skilled workers that could be quickly deployed into action. The implication of this is that decades of globalisation will slowly begin to unravel. And countries that were the biggest beneficiaries, such as China, will need to look inward if they are to restore growth to pre-Covid levels.
The pandemic has also, and will continue to, expedite the move towards online channels and provide a further boost to IT companies that are already benefiting from large numbers of people working from home.
Concluding remarks
We expect that there will continue to be bumps in investment markets as the path of the pandemic twists and turns. A slump in earnings, tensions around the US election and Chinese relations, and instances of civil unrest are some of the potential factors that may also see a market correction from time to time. Some of these movements may be volatile.
Overall, however, investment in share markets and other investment markets remain one of the best ways to build long-term wealth. During this period, it will be important to stay the course and keep your focus squarely on your longer-term goals.
Disclaimer: This economic and market update has been prepared by Evergreen Fund Managers Pty Ltd, trading as Evergreen Consultants, AFSL 486 275, ABN 75 602 703 202 and contains general advice only.
Information contained within this update has been prepared as general advice only as it does not take into account any person’s investment objectives, financial situation or particular needs. The update is not intended to represent or be a substitute for specific financial, taxation or investment advice and should not be relied upon as such.
All assumptions and examples are based on current laws (as at June 2020) and the continuance of these laws and Evergreen Consultants’ interpretation of them. Evergreen Consultants does not undertake to notify its recipients of changes in the law or its interpretation. All examples are for illustration purposes only and may not apply to your circumstances.
