Where to From Here for the Economy and for the Markets?

Friday, May 29, 2020
Where to From Here for the Economy and for the Markets?

Written by Hudson adviser Phillip McGann

State of Play for the local economy

Whilst reports on the economy seem to be very clouded at present the share market is more buoyant and seems to be "looking through the doom and gloom" to a more vibrant future 12 months out.

Consider:

  • The economy has been in a government induced coma for the past two months. Whole industries (tourism, hospitality, most of discretionary retail, tertiary education) have been shut down and their workers on government support.
  • The Job Keeper program has been a "big success" with over 3.1 million workers receiving it via their employers (and actually at only half the cost of what Treasury predicted 2 months ago - see quote below)
  • Jobseeker (the renamed Newstart or Dole) has over 1.6 million recipients after 600K extra people were added last month.
  • The banks (in a valiant attempt to redeem their shattered reputation after the Royal Commission) have extended loan honeymoons (not loan forgiveness, just interest deferments) to over 500K clients.
  • The June quarter GDP figures are forecast to show a decline in economy of as much as 10%.
  • China has started to flex its' considerable financial muscle via our trade interactions due to a perceived slight from the government in relation to actually wanting to know more about the origin of the virus that has closed down half the globe.

And in the midst of all this doom and gloom the Share market, following leads from offshore, has recovered 18% since its nadir in late March as investors try to look through the gloom to a brighter future.

So what to make of it all?

The economy is in desperate straights right now and will need continued fiscal (government) and monetary (RBA) assistance for a while yet.

And the help is coming in truck loads. The government has decided to abandon its long held surplus hope months ago and will not die wondering if it had done enough to support a fragile economic environment. The government is shovelling funds out in all directions. The RBA likewise is deep into the debt markets doling out our version of quantitative easing after it cut rates to effectively zero and now has run out of conventional means to stimulate the economy.

So the support is there but the issues are global and ongoing.

Internationally countries are faring way worse than us medically and economically. A cursory glance at the global situation in the US, UK, Spain, Italy, Russia and now South America gives us all pause for thought and potentially a guilty feeling while pondering "thank god I live here and not there"

The outlook for Australia in comparison to others is very appealing over the longer term if we take the opportunities we have been given and run with them.

Our major resources (exports) are enjoying strong demand from China and others and prices are holding up well for iron ore, though softer for coal. A weaker oil price has impacted energy prices as well.

The International student market is in big trouble in the short term but can turn things around over the next 12 to 24 months.

The $40 Billion annual industry needs the University sector and the Federal Government to work together to build on our strong appeal to the affluent middle class of China and India as they decide where to send there children for offshore education over coming years.

If you were the parent of a University aged child living in China or India deciding now where you were going to send them in 2021 or 2022 what would you do?  Would you rather send them to a country that performed amongst the best in terms of number of cases during the Covid-19 pandemic or (our main competitors) such as the UK or the USA that performed poorly?

Likewise international tourism has been a top five export earner for Australia for the past two decades and that has more or less closed for the time being.

However, as the world opens up again and the tourist dollar looks for exotic destinations that are appealing in a post covid world Australia should be very high on the list of the "clean, green and covid free"

So how to Invest into the sharemarket in a post-Covid World?

Well, we are not in a "post-covid world" yet and will not be until treatments and/or a vaccine is developed and deployed and that may be 6 to 12 months+ away. However there are good signs that the curve has been flattened locally and offshore and the virus is under control.

Also there is always the fear of second and third waves which is playing on the economic outlook with continuing lockdowns and also reluctant consumers not as yet comfortable to go back to anything like there pre-covid lifestyle and this is what is leading to market gyrations still.

Volatility is the order of the day for the last 3 months and will likely be so again over coming months.

The bear market from late Feb to late March was a massive correction in a very short period of time only matched by the recovery since where the local market has rapidly risen to retrace half of the declines. The US market has seen an even more dramatic rise from the low point of 23rd of March.

Is this sustainable in the midst of horrific economic news and forecasts?

Is this recovery merely a "bear market rally" whereby the punters have been keen to resume "normal times" and "buy the dips" in the volatile market?

Time will tell and it will likely be over coming weeks and months when we will know for sure. The share market is a forward looking indicator and investors are trying to predict the economic outlook in 12 months time, not today.

Hudson recommends the best time frame for share investing is at least seven years

So if you are already invested "Stay the Course"

If you are seeking to enter do so gradually over the next 6 to 12 months.

As always consult you Hudson adviser before making major decision on your portfolio. Call 1800 804 296 to book in a call.

QUOTE:

"Josh Frydenberg says there are three reasons for the JobKeeper miscalculation: Human error and an inability to count"

Source : Satirical news site The Shovel

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