Monthly economic e-news – April 2020
15 April 2020
By Craig Turnbull
Chief Investment Officer
COVID-19 exposes some of the vulnerabilities of globalisation
Over recent decades, globalisation has driven economic growth across the world in both advanced and emerging market economies. However, the COVID-19 pandemic has now exposed some of the vulnerabilities of globalisation.
COVID-19 is primarily a health crisis but the world is now so interconnected that the virus has very quickly disrupted business, global trade and the working lives of millions of people. This has created an unprecedented level of volatility on share markets around the world and here in Australia.
Source: Yahoo Finance
Factors driving the high volatility on global markets
In February, as daily infection rates increased exponentially across Europe, the US and here in Australia, these rates became a leading indicator for global investors.
Subsequent restrictions on business and personal movement created more uncertainty triggering steep declines on share markets around the world.
In the US, the S&P 500 slumped by one third in just 33 days. In Australia, the ASX 200 followed a similar trajectory, down more than 35% over the same period.
In late March, the Federal Government announced the $130 billion JobKeeper package and there was some flattening of the curve for new infections in Australia. This news helped to ease some of the fears and the share market has stabilised in recent weeks.
However, markets are likely to remain relatively volatile while there is still uncertainty about what the impact the business closures and the restrictions on movement will have on company earnings.
Australia is in a good position compared to many other countries but globalisation means that our share market is unlikely to fully recover until our local economy, and the economies of our major trading partners, start returning to normal.
Outlook for the local economy during the COVID-19 restrictions
While the restrictions remain in place, it’s expected that unemployment will spike and the local economy will contract over the coming months, and this may potentially trigger the first recession in Australia for 29 years.
Larger listed companies will be in a better position to trade through the restrictions. However, the economic contraction will reduce the earnings of many companies and they may be forced to cut dividend payments for shareholders.
In fact, the Australian Prudential Regulation Authority has advised banks to consider reducing their dividend payouts and instead use these funds as a buffer and to maintain their lending capacity during the crisis.
The Federal Government’s JobKeeper package is designed to cushion the blow by helping businesses go into ‘hibernation’ during the restrictions. The key element of the package is a subsidy for eligible employers so they can continue to pay their full-time, part-time, and long-term casual employees $1,500 per fortnight.
So instead of closing their doors and standing down their staff, businesses will be able to maintain a connection with their workers and be ready to reopen for business when the restrictions are lifted.
Of course, this policy is untested but the aim is to support people through this period and help the economy recover as quickly as possible on the other side of the crisis.
What will it mean for super returns?
Volatile share markets and lower dividends will have an impact on super returns in the short term. However, LGS invests in a diverse range of financial assets, and to date, returns for all our investment options have been markedly less volatile than the share market.
It’s important to keep in mind that any cuts to dividends may also affect self-funded retirees who are dependent on these regular payments to supplement their pension.
So if you are concerned about your investment strategy, or your income during this period, you should make an appointment to discuss your options with your financial planner.
Markets at a glance
for the month ending 31 March 2020
Australian shares1 down by 20.65%
Australian Government Bonds yield2 down to 0.765%
Australian dollar down to US$0.6175
Cash rate3 down to 0.25%
International shares4 down by 13.19%
1 ASX 200 Accumulation Index
2 Yield on 10 year Australian Government Bonds
3 RBA cash rate
4 MSCI – World ex Australia (USD)