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Light At The End Of The Coronavirus Tunnel - What Does It Mean For Investors?

30 April 2020

Sourced with thanks from Dr Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital.

Key Points

  • From their high in February to their low around 23 March, global shares fell 34% and Australian shares lost 37% as all the news was bleak.
  • After a strong 20% rally recently, in the short-term shares are vulnerable to soft economic and earnings news.
  • However, positive news on the coronavirus outbreak is starting to get the upper hand – with evidence of curve flattening, an easing in lockdowns and massive policy stimulus pointing to a possible return to growth in the second half, which should ultimately underpin a rising trend in share markets beyond short-term uncertainties.
  • This is all very different to five or six weeks ago when there was talk of six-month lockdowns, no confidence as to whether they would work and the policy response was seen as inadequate.

The blanket coverage of coronavirus and its impact on the economy has lead to a lot of confusion. So first the bad news and then the good.

The Bad News

  • The reported number of coronavirus cases globally is still rising and is now approaching 3 million.
  • Many worry about a “second wave” of cases as occurred in the 1918 Spanish flu outbreak.
  • Most medical experts still say a vaccine may be a year or more away.
  • In the absence of a vaccine some worry about coronavirus outbreaks every winter as it migrates around the world.
  • Economic activity data is literally falling off a cliff. This was highlighted last week by the IMF’s forecast for a contraction in the global economy of 3% this year and in advanced economies of around 6%.
  • We are constantly hearing forecasts of unemployment going to 10%, 15% and maybe even 30% in the US (which does not have the benefit of Australian JobKeeper wage subsidies).

This in turn is creating much consternation around whether there will be an economy left once the shutdowns end and/or how governments will get their debt down. 

The Good News

  • While the total number of coronavirus cases is rising, new cases appear to be levelling off or in decline.
  • While Australia’s PM Scott Morrison has indicated that current restrictions will remain broadly in place for another few weeks, he has indicated three criteria for an easing in restrictions: better testing; better contract tracing; and confidence in containing outbreaks all of which makes sense given the risks Australia faces coming into winter.  For Australia this is likely to mean a gradual opening up from May.
  • Fiscal and monetary stimulus has been ramped up to enable economies to bounce back faster. This is particularly the case in Australia where the focus has been on job subsidies to preserve jobs, support businesses and low-cost RBA funding has enabled banks to offer loan payment holidays.

What Does It Mean For Investors?

  • If, as appears likely, an easing of the lockdowns becomes common place in May/June, then April or maybe May should be the low point in economic data much as February was in China.
  • This does not mean that things will quickly bounce back to normal – some businesses will not reopen, uncertainty will linger, debt levels will be higher and business models will have to adapt to different ways of doing things around working and shopping.
  • The recent strong rally in shares has left them a bit vulnerable in the short term and a re-test of the March low cannot be ruled out – particularly as we have now entered a period which is likely to be seeing very weak economic data and news on profits.
  • However, shares are likely to be higher on a 1-2 year horizon as evidence of curve flattening, easing shutdowns combined with policy stimulus ultimately see a return to growth against a background of still very low interest rates and bond yields.
  • From a fundamental investment point of view the historical experience that covers recessions, wars and even pandemics (in 1918) tells us that the long-term trend in shares and other growth assets is up.
  • Trying to time bottoms is always very hard. No one will ring the bell at the bottom, which by definition will come at a time of maximum bearishness when all the news is horrible.

Read the full article by Dr Shane Oliver here. 

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