News, Views, and Commentary:

“The markets are pricing in all of the good news and not much of the bad news”. 

That’s the opening quote from our Magellan people in a portfolio update we had last week and, while the share price recovery over April and May has been a relief to everyone, the truth is it has been as uninformed and emotion-based as the severe price falls during March.   And the first bits of solid fundamental data are only just emerging now. 

From the most recent market lows on 24th March, the Australian All Ordinaries Index has rebounded by +29%, and the US Dow by an incredible +37%. 

This means that, as things stand, the All Ords is down only 19% from its high in late February and the US Dow is down by just 13%.  It seems a little optimistic when so many corporations are downgrading earnings expectations by 20%-30% and dividend payments are being challenged.   See chart (below left).

On top of this, geopolitical risks have increased and are reasonably expected to worsen throughout an Election year in the US.

We know by now that share markets are very difficult to pick in the short term and are impossible, barring good luck, to actually time.  And we’ve seen yet again that sentiment, both good and bad, can carry markets a long way too.  It is possible that share prices can maintain current levels based purely on positive sentiment, with cities and towns starting to open up, and aided by very low interest rates which will likely drive investors towards shares again instead of term deposits.  

The chart (below right) shows, in real time, how different consumer activities are starting to shift: from their low points (blue bars), to last week’s activity (pink line) and to this week (red line). All of these measures are improving, with public transport use and restaurant reservations unsurprisingly being the slowest to resume but even these have started to move now with the latest easing of restrictions.  

So while it is possible that financial markets have begun a recovery, on the balance of probability we think it is more realistic to expect markets to take another hit before any sustained or reliable recovery can begin, and this is a view shared by many analysts.

Uncertainty rules and what happens next depends on so many things both Virus-related (eg, society opening up, will winter matter, what variants of Covid-19 will appear) and Economic (the so-called ‘output gap’, and what happens when Gov’t support stops). 

At this point, no-one can accurately gauge the impact on actual companies.  

Sources: RBA, Quilla Consulting, Magellan Global Inv, AMP Capital Investors.