MAY 2020 MARKET UPDATE

 

• Shutdowns, isolation, and social distancing measures have had a profound impact on consumer facing sectors and have resulted in large spikes in unemployment
• Central banks around the world have embarked on unprecedented emergency lending and bond buying programs to combat the economic effects of COVID-19
• The Reserve Bank of Australia kept rates on hold at 0.25% at its May meeting and continued targeting the 3-year government bond yield at the same rate
• Growth in new COVID-19 cases  in Australia slowed significantly in April, although a second wave of infections could eventuate if restrictions are eased too quickly
• The Bank of England forecasts UK GDP to contract by 14% in 2020, driven by a 25% decline in the June quarter, to be followed by a rapid recovery 

 

GLOBAL ECONOMIES

The world economy remains in the grip of the COVID-19 shock.  Governments are deploying stimulus measures, including extensive employment subsidies to retain work-firm relationships.  March quarter economic growth points to a sharp downturn globally, while the contraction could be more pronounced in the June quarter given lockdown measures were in full force in most regions by April. 

 

AUSTRALIA

The Australian economy is expected to contract by at least 5% in the June quarter after a small contraction in the March quarter, thereby meeting the technical definition of a recession.  However, no data is needed to confirm what has already been observed: shutdowns, isolation and social distancing measures have virtually closed large sections of the economy, causing a surge in unemployment not seen since the Great Depression.

The good news is that the lockdown measures appear to have been effective, and in early May attention turned to re-starting the economy and putting in place the measures and safeguards required to avoid a second wave of cases.  

The Reserve Bank of Australia kept the cash rate on hold at its May meeting at 0.25% and maintained its yield target for 3 year government bonds at the same rate.  The Bank reported that its bond purchases have so far totalled around $50 billion and that, in light of improving conditions in bond markets, has begun scaling it back with a view to increasing it again if the situation requires.  

Payroll data showed a fall in employee jobs of 7.5% nation-wide (around 975,000 employees) between mid-March and mid-April, and a drop in total wages paid of 8.2%.  Retail turnover rose 8.5% in March as consumers stockpiled ahead of lockdown measures, but cafes and restaurants didn't fare so well, experiencing a 22.9% fall in sales. 

A note on Australian Equities: Despite the recovery in April, the magnitude and duration of the disruption remains uncertain and near-term expectations remain heavily discounted.  Over half of ASX 200 companies have downgraded or withdrawn earnings guidance due to the lack of visibility in assessing the extent and severity of the COVID-19 outbreak.  Dividends for banks, property and infrastructure shares are expected to decline as companies attempt to counter demand shocks through rapid cash conservation measures, while capital raisings have intensified as businesses move to strengthen balance sheets. 

Coles Group (+2.3%) announced its March quarter results with Comparable Sales Growth (CSG) of 12.4%, benefiting from a shift in consumer behaviour following the outbreak.  Likewise, JB HiFi (+25.6%) reported it experienced an acceleration in sales in late March.  Despite closing its three airport stores and seven CBD locations, sales grew 11.6% for the quarter, while all The Good Guys stores remained operational and delivered sales growth of 13.9%.  Westpac (-1.3%) reported cash earnings (excluding notable items) of $2.3 billion, down 44% to the previous year, largely driven by a $2.2 billion impairment charge.  The IT sector bounced back strongly in April with key stocks After Pay (+66%) and Appen (+31.2%) returning to their pre-outbreak levels. 

 

UNITED STATES

March quarter GDP plummeted to an annualised 4.8% contraction, below expectations of a 3.7% fall, as the initial impact of COVID-19 filtered through the economy.  Within the GDP report, consumer spending showed a sharp decline, falling 7.6% versus an expected 1.5% contraction. 

 

EUROPE

Even before the pandemic hit, the eurozone story was one of mediocre economic growth, with a modest expansion in the services sector being offset by a contraction in manufacturing.  The COVID-19 pandemic undercuts even this lacklustre narrative by hitting services extremely hard. 

 

CHINA 

The Chinese economy contracted by 9.8% in the March quarter compared to the December 2019 quarter, taking the annual growth rate to -6.8%, down from positive growth of 6.0% in the December 2019 quarter.  According to the IMF, growth is forecast to recover, but only to 1.2% for the whole of 2020. 

 

ASIA REGION

Also according to the IMF, Japan's GDP is forecast to contract 5.2% in 2020 on the previous year.  The economy was already on a precarious footing, with GDP shrinking by an annualised 7.1% in the December quarter, hit by the rise in the consumption tax and a devastating typhoon - the strongest in decades to hit mainland Japan.

 

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.