Monthly economic e-news – June 2020
12 June 2020
By Craig Turnbull
Chief Investment Officer
Easing of restrictions has been a boost for investor confidence
As new infections of COVID-19 have dwindled over recent weeks, state governments have eased many of the social and economic restrictions and this has boosted investor confidence.
The Australian share market has been climbing back since the low point in late March but there is still some uncertainty about how fast the economy is likely to recover and what that means for company earnings.
Source: Yahoo Finance
What’s been influencing the Australian share market?
Despite some volatility, the ASX 200 has climbed more than 20% over the last two months mainly on the back of strong commodity prices, particularly iron ore, and more recently, a strong rally for Australian bank shares.
Rising demand from China and the disruption to iron ore production, due to the spread of COVID-19 in Brazil, has driven up the global spot price of iron ore to more than US$100 per tonne in early June.
As a result, the share prices of our iron ore producers have spiked with Fortescue Metals surging more than 40%, BHP up over 30%, and Rio Tinto rising around 25% since late March.
The introduction of the COVID-19 restrictions saw business confidence plummet and many analysts predicted a steep rise in bad and doubtful debts. These concerns triggered a sharp fall of around 40% in the share prices of our major banks.
However, according to the latest NAB Monthly Business Survey, confidence improved in April and May and this has helped to boost bank shares. There have also been good gains for regional banks including Bendigo and Adelaide Bank, Suncorp, and the Bank of Queensland.
But it’s important to note that while business confidence is recovering, it will take a lot longer for some sectors of the economy to return to normal.
But is the share market running ahead of the economy?
Over the last couple of months, economists and commentators have been speculating on whether our economy is likely to experience a rapid V-shaped recovery, a longer U-shaped or even a protracted L-shaped recovery.
But the reality is that different sectors of the economy will recover at different rates depending on a number of factors including the impact of the restrictions and the sector’s exposure to the global economy.
The impact of the COVID-19 restrictions have been limited for some sectors including mining, healthcare and essential retailers but these sectors should still benefit as the general recovery gets underway.
Investors are assuming that the financial sector will bounce back as people get to return to work and resume spending. Nevertheless, there is still uncertainty around what impact the winding back of JobKeeper payments and the banks’ temporary mortgage relief will have on their bad debt provisions and their earnings.
Air travel and tourism were hardest hit by the restrictions, however, there is some optimism with Qantas announcing plans to gradually increase its domestic flights to around 40% of pre-pandemic levels by the end of July.
While the news boosted Qantas’ share price by more than 15% in one week, there is currently no plans to ease all international travel restrictions and this will hamper any meaningful recovery in these sectors for some time to come.
What will this mean for share prices and super returns?
The recent boost to confidence has been good news for investors and super members, helping to reverse some of the losses from earlier in the year.
But the uncertainty about how different sectors of the economy will recover, and what impact it will have on corporate earnings, means the share market may remain volatile in the short to medium term.
During these periods of uncertainty and volatility, a good financial planner can help you understand the risks and make sure you have the right strategy for your super and your investments.
Markets at a glance
for the month ending 31 May 2020
Australian shares1 up by 4.36%
Australian Government Bonds yield2 down to 0.885%
Australian dollar up to US$0.6659
Cash rate3 steady to 0.25%
International shares4 up by 4.63%
1 ASX 200 Accumulation Index
2 Yield on 10 year Australian Government Bonds
3 RBA cash rate
4 MSCI – World ex Australia (USD)