JULY 2020 MARKET UPDATE

 

• Since the initial outbreak, COVID-19 has spread to over 210 countries and estimates indicate it could trim global economic growth by between 3.0% to 6.0% in 2020
• Cyclical indicators including PMI's and unemployment rates remain weak but are improving, bolstering the market's hopes of a speedy recovery
• Some countries and US states reversed course in late June, reimposing social distancing measures and closing businesses to prevent a second wave of infections (Australia was to follow suit shortly after...) 
• Market volatility declined while large raisings of debt and equity have helped to strengthen balance sheets during this period of uncertainty
• The Reserve Bank of Australia kept rates on hold at 0.25% at its July meeting and is prepared to scale up bond purchases if needed

 

GLOBAL ECONOMIES

The rise in the number of COVID-19 cases globally continues to create uncertainty about the shape of economic recovery.  An important factor in coming months will be the extent to which governments continue with fiscal measures to support businesses and households.  Meanwhile, tensions between the US and China are elevated, and the outcome of the US presidential election in November remains unclear. 

 

AUSTRALIA

The Australian economy contracted by a relatively mild -0.3% in the March quarter but given the full impact of shutdowns likely to be felt in the June quarter, it is almost certain that the Australian economy is in its first recession in 29 years.  Australia's relatively successful containment (!) of the COVID-19 virus has resulted in health outcomes overall tracking better than initially estimated.  This has allowed an earlier-than-expected easing in lockdown conditions, although some States are faring better than others.

Businesses and households have received significant government support from the JobKeeper and JobSeeker programs, the launch of the $25,000 Homebuilder program, and other incentives by State governments.  Further easing of lending criteria by APRA in addition to loan repayment deferrals by the major banks has lent further support.  However retailers are looking nervously ahead to September when the JobKeeper payments are scheduled to end.  The scheme, which has benefitted around 3.5 million employees,  is being reviewed by Treasury which will report its findings later in July. 

The Reserve Bank of Australia's outlook for the economy and interest rates was recently described by Governor Lowe as a world 'where there'll be a shadow from the virus for quite a few years' causing 'deflationary forces' and 'large output gaps'. 

A note on Australian Equities:   Australia's S&P/ASX200 index rose 2.6% in June and was up 16.5% over the quarter as the country emerged from lockdown.

It is apparent that many investors were 'voting' for a sharp rebound once the dark COVID-19 clouds cleared (although they may be coming back again).  The S&P/ASX200 index ticked past 6,000 points in early July and was once again in bull territory.   Stocks that are leveraged to online retail activity were standout performers during the isolation period (including Kogan, Temple & Webster and City Chic).  The past three of months of hyper growth rates in online sales have been the equivalent of the past three years of cumulative growth. 

Afterpay (+28.6%) announced a $800 million capital raising and co-founder sell down, while Qantas Airways (-5.3%) provided a post-COVID recovery plan, which focuses on rightsizing the workforce, along with a planned equity raising of up to $1.9 billion.  For many, capital raisings have been necessary to bolster solvency and near term operational liability.

For some other companies, it has been an opportune time to strengthen balance sheets and thus provide a layer of insurance if the economic malaise continues.  Given APRA's written guidance to the banks that they should be limiting discretionary dividend payments, boards are likely to be conservative with payout ratio's.  For the banks, the key headwinds are the ultra-low interest rate environment, which has eaten into lending margins, and the risk of impairments.

 

UNITED STATES

Economic data for June saw some upside surprises as a gradual reopening of the economy clawed back job losses resulting from lock down - this may change, however, with many areas moving back into various stages of being locked down.

 

EUROPE

As European Union nations began reopening their borders to other EU members, debate continued regarding when the bordered should be reopened to non-EU countries. 

 

CHINA 

Economic data indicates that the world's second-largest economy is gradually recovering from the pandemic. 

 

ASIA REGION

Throughout South-East Asia, the response to the pandemic has seen mixed results.  The total number of cases in the region reached 170,000 in early July, with Indonesia the worst hit, both in terms of new cases and deaths. 

 

AMR

 

This update was written by Lonsec Research Pty Ltd. Information contained on this web page is of a general nature only and your personal financial position, objectives or needs have not been considered.  Please ensure you have the necessary financial, tax and legal advice before acting on this information.  Do not rely upon it when making financial decisions.