News, Views, and Commentary:

We realise you’re probably in coronavirus-information-overload, but the things we talk to you about – planning and positioning amid volatility, and market and economic trends – now depend on certainty and transparency and this is all influenced by expectations around the virus. 

In a rapidly moving environment, here’s our current thinking presented in three sections: The Virus, The Economics, and The Markets:

The virus

Recent developments in the spread of the virus around the world include:

  • Better news in some European countries and Australia/NZ.  New cases in Australia have fallen to just under 20 a day (chart below), but sadly sitting at 80 deaths;
  • In the US, new cases per day had peaked a few weeks ago around 35,000 and then fallen back to around 25,000 a day however, in the last few days they have ticked back up over 30,000 a day and are running at 200,000 a week. The US now has almost 900,000 total cases and just over 50,000 deaths (observation: if our per capita death rate was the same as the US we’d have around 5,000 deaths…);
  • New cases in China have risen slightly as attention focuses on a new outbreak on the border with Russia;
  • Europe has passed the peak, but the pace of improvement in Spain seems to be stalled for now. The Spanish government has extended the lockdown for a while longer.

Here in Australia, the better news on infections has been accompanied by further reports of treatments and vaccines, as well as imminent relaxation of restrictions. There is mounting pressure from some vocal activist groups in the US for States to relax controls but fortunately so far this has been met with resistance from State Governors. The Governor of California said, “For those who think we’re out of the woods, those who think we’ve turned the page, those who think we can go back to the way things used to be, I caution you…”.

The focus is increasingly turning to testing and tracking to help find the balance between easing restrictions and keeping control of the virus. This buys time for a vaccine to become available.

Australia – new daily cases (to 25/4/2020)

The economics

The most recent economic news at date of writing includes:

  • In the US, weekly unemployment benefit claims were 5.2 million, bringing the total to 22 million in the past four weeks. Unemployment is expected to rise to 14% or more in coming weeks;
  • The New York Fed’s weekly economic index shows US real GDP running at -11.4% year-on-year;
  • Regional PMIs (purchasing managers’ index) for the US have fallen to levels which suggest the Manufacturing Index (ISM) result for April will be in the low 30s, which would be one of the lowest readings in the last 60 years;
  • China’s GDP fell 6.8% from a year earlier, the worst result since 1992. Retail sales and investment both fell around 16% in March. China’s factories are slowly getting up to speed again, but it is taking longer than expected because both domestic and external demand is still weak. China has focused on supply side recovery, but the demand side is lagging;
  • The IMF said it expects growth in developed countries to fall around 6% in 2020 and recover 4.5% in 2021. The emerging markets bloc is expected to see growth of -1% in 2020, supported by China, and then followed by 6.6% in 2021. This outlook relies on the pandemic peaking in the next three months and social distancing restrictions easing in the second half of the year.

The pace of deterioration in the global economic data is accelerating, with worse to come. Most of the attention so far has been on macro data – growth rates, unemployment, etc – but increasingly the focus will turn to micro data as surveys and earnings reports reveal more about the state of businesses and households.

And this chart of the most recent Sentiment Survey from WBC-Bank of Melbourne speaks loudly.

The markets

  • Equity markets have bounced back somewhat since our last Newsletter, though something around 85% of market analysts, investors, and consultants (ourselves included) expect that this has been some sort of relief rally buoyed by declining Virus case rates and hopes of a vaccine coming along sooner rather than later.  We’d observe though that there is still no clarity or certainty around an end-date, or the economic damage that might be done in the meantime. 

  • On the positive, we’ve seen Governments stepping up like never before with enormous economic and human-support packages and Central banks acting swiftly and decisively in concert with them.  That looks good for the economy and society all round – drastic times calling for dramatic action. 

  • But are the markets reconciling the facts with any clarity?  Are the markets reading it right?  We saw a comment during the week from a US based investment manager who wondered out loud about the obvious discord between market-full of companies whose earnings may shrink by 30% or more versus sharemarkets that have dropped 15% or so since late February.  On the other hand, see Paul Taylor’s article below (The ‘rule of thumb’) and note that the financial markets move 9-12 months ahead of the economy itself – so maybe markets see a light at the end of the tunnel already?        

  • So these two little examples illustrate the competing scenarios we face.  The result?  Complete absence of certainty + the human emotional impacts of the virus and social impacts = potential for major volatility.  

Sources: Australian Government, WHO situation reports, Centre for Disease Control (USA), RBA, Quilla Consulting, Perpetual Investments.