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Market update: Economic developments and Coronavirus lockdowns

Ongoing: Coronavirus developments have continued to drive global share markets lower – even as policymakers worldwide deliver a range of support measures. Will investors see a light at the end of the tunnel? Senior Investment Manager George Lin offers an update.

       Written by George Lin
Senior Investment Manager | Colonial First State
 

 

 

What happened?

The Coronavirus situation deteriorated significantly over the weekend in both Australia and overseas. By the start of the week, the total number of confirmed cases worldwide exceeded 350,000 – with Europe overtaking China to become the most severely impacted region. Although governments have implemented lockdowns and policymakers have announced stimulus support packages, investor confidence appears little improved – driving markets lower to start the week.

 

Developments in Australia

Australian Prime Minister Morrison announced “stage one” restrictions starting from noon yesterday (23 March). A number of indoor venues – including registered and licensed clubs, licensed premises in hotels and clubs, restaurants (barring takeaway and delivery), places of worship, cinemas and other forms of entertainment – have been shut.


Separately, Victoria and NSW have announced the shutdown of all non-essential services over the next few days. Australia has therefore joined a number of other developed countries that have previously announced more severe restrictions over the past few days. For example:


  • A number of states in the US are currently in lockdown. California told its residents to leave their residences only for absolute necessities, while New York ordered all non-essential businesses in the state to close and non-essential workers to stay home. New Jersey, Pennsylvania and Illinois have all announced similar measures.
  • A three-week lockdown was announced over televised address for people in the United Kingdom, with non-essential businesses and locations to be closed, and people only allowed to leave their homes to buy the essentials, to travel to work (if unavoidable), or to seek medical care. The government will review the measures after this time.
  • Elsewhere, Germany has banned gatherings of more than two people, except for families. Chancellor Angela Merkel is self-isolating after being treated by a doctor who was confirmed to have the virus.

 

In addition, the government announced that some impacted Australians would be eligible to access part of their superannuation funds early through myGov. It also announced temporary reductions to the minimum superannuation drawdown requirements to help retirees manage the impact of volatility on their savings. These measures are available over the 2019-20 and 2020-21 income years.

 

More information on the new measures can be found on the Colonial First State website.

 

Developments overseas

Over the weekend, US policymakers failed to agree on a multi-trillion-dollar stimulus package after the Democratic Party said it did not believe the proposed bill did enough for the average American. On Monday, the stimulus bill also fell short of the Senate votes needed to pass it through Congress. Overnight (23 March), the US Federal Reserve (the Fed) announced unprecedented measures in an effort to “contain mounting economic and financial-market fallout from the Coronavirus”. The central bank said it would buy unlimited amounts of Treasury bonds and mortgage-backed securities to keep borrowing costs low and markets functioning properly.

 

Market reactions

  • The Australian share market fell on 23 March. The ASX 200 was down 5.6% (or 270 points to 4,546) after markets recovered some of their sharp early morning losses in the afternoon session. The Australian 10-year bond yield declined by 23 bps to 0.91%. And by the close of trading, the AUD was trading at 0.5772 USD.
  • Overnight, US share markets started the week down, with the Fed’s stimulus package failing to improve investor confidence. The Dow Jones fell by 3%, the Nasdaq fell marginally by 0.3%, while the S&P 500 fell by 2.9% – down almost 35% from its record high only a month ago. Meanwhile, US Treasury bond yields were lower as investors continued to favour safe-haven assets. For example, US 10-year yields fell to just 0.74%.
  • Across Europe, share markets fell on fears that economic stimulus measures would do little to prevent recessions across the region. The pan-European STOXX 600 fell by 4.3%, the German Dax fell by 2.1%, and the UK FTSE fell by 3.8%.

 

Analysis

The sharp increase in the number of confirmed cases in Europe, the US and Australia surprised markets. Furthermore, the speed and the severity of the various non-voluntary social distancing measures announced by different governments were rather unexpected – particularly since most observers believed, as recently as seven days ago, that the Western democracies would be more hesitant in imposing such drastic measures as seen in China.


With international air traffic grinding to an almost complete halt and an increasing number of economies each initiating different lockdowns, economic growth will likely be severely impacted. While we do not necessarily have a high level of confidence in the following scenario, one baseline scenario could show:

  • the global economy contracting in the March quarter
  • even worse growth numbers posted in the June quarter when the economic impacts of the lockdowns will be most severe
  • a reversion to a more normal level of activity in the second half of 2020.


However, as we have stressed before, forecasting is almost impossible since much is dependent on the spread of the Coronavirus, the ensuing containment measures and the speed at which the number of new cases respond to those containment measures. The experience of China suggests that the Coronavirus can be brought under control around eight weeks after restrictive “draconian” measures are implemented. However, in this case, “brought under control” does not mean the eradication of the virus, but a significant enough decline in the number of new cases such that the level of economic activity can start to normalise. Is this reliable guidance as to the path of the various Western economies? At this time, we simply don’t know.


Will we see a light at the end of the tunnel? Markets are struggling to correctly price risks in the current environment – thus, the very large price reactions of both equity and debt markets to both positive and negatives news on a daily basis. We expect this very high level of price volatility to persist over the next few weeks. The one piece of good news which we have observed over the last few days is that the massive, co-ordinated interventions by the central banks – including the Reserve Bank of Australia – seem to be providing some stabilisation to debt markets. For example, we have seen a decline in sovereign bond yields, including in Italy. This has at least delivered some diversification benefits to investors in our multi-sector funds. However, credit markets remain on the stressed side, meaning central banks may have to implement additional liquidity measures to stabilise debt markets in future.

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Unless otherwise specified, this document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at the date of publication. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including Colonial First State or any member of the Commonwealth Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. Colonial First State is the issuer of interests in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice Wholesale Pension, FirstChoice Employer Super offered from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. It also issues interests in the Rollover & Superannuation Fund (ROSCO) and Personal Pension Plan (PPP) offered from the Colonial First State Rollover & Superannuation Fund ABN 88 854 638 840. Colonial First State also issues other investment products made available under FirstChoice Investments and FirstChoice Wholesale Investments, other than FirstRate Saver, FirstRate Term Deposits and FirstRate Investment Deposits which are products of the Commonwealth Bank of Australia ABN 48 123 123 124, AFS Licence 234945 (the Bank). Colonial First State is a wholly owned subsidiary of the Bank. The Bank and its subsidiaries do not guarantee the performance of FirstChoice products or the repayment of capital from any investments. This document provides information for the adviser only and is not to be handed on to any investor. It does not take into account any person’s individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) before making any recommendations to a client. Clients should read the PDS before making an investment decision and consider talking to a financial adviser. PDSs can be obtained from colonialfirststate.com.au or by calling us on 13 18 36.

 

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