Monthly economic e-news – May 2020
12 May 2020
By Craig Turnbull
Chief Investment Officer
Share market improves despite the gloomy outlook for dividends
The COVID-19 restrictions have effectively shut down a large proportion of the Australian economy, driving the high levels of volatility on the share market over recent months.
However, since late March, there’s evidence that retail investors have re-entered the market in high numbers despite the economic uncertainty and the negative outlook for company earnings and dividends over the short to medium term.
Source: Yahoo Finance
Retail investors are diving into the share market
Recent analysis by the Australian Securities and Investments Commission (ASIC) has revealed a substantial increase in retail activity across the share market during the pandemic with some investors engaged in short-term trading strategies.
ASIC found that there was a sharp increase in the number of new retail investors entering the market, in fact, 3.4 times the usual rate. There was also a marked increase in the number of investors reactivating their dormant trading accounts.
It appears that some investors, their confidence possibly buoyed by the declining infection rates in Australia, perceive that the market may have bottomed and they are looking to make gains as the recovery gets underway.
But other investors are attempting to ‘time the market’ in order to extract quick profits from the short-term ups and downs of volatile share prices.
ASIC warns that even market professionals find it hard to time the market and that retail investors chasing quick profits have traditionally performed poorly even in relatively stable market conditions.
These strategies pose a risk of significant losses for investors and self-funded retirees as companies announce significant falls in earnings and cuts to dividends due to the economic fallout of the pandemic.
Impact of the pandemic on earnings and dividends
The Reserve Bank recently forecasted a 10% contraction in Australia’s GDP in the first half of 2020 and there’s no doubt that this will be reflected in the earnings of many companies and the dividends they pay their shareholders.
Australia has one of the highest dividend payout ratios in the world and last year, companies listed on the ASX 200 paid out almost $80 billion in dividends. The four major banks paid out just under $24 billion, representing 30% of all dividends.
Three major banks have already delivered the bad news on earnings and dividends.
Westpac’s half-year cash earnings fell by 70% in the six months to March 2020, mainly due to a substantial increase in provisions for bad debts as a result of the pandemic. In order to preserve capital, the bank deferred the payment of an interim dividend to shareholders.
Both ANZ and NAB’s saw their half-year profits approximately halved. While NAB slashed their interim dividend to just $0.30 per share, ANZ followed Westpac’s lead and deferred their interim dividend.
Most companies on the ASX 200 report their full-year earnings to 30 June so we may need to wait until the August reporting season to see the full impact of the COVID-19 restrictions on earnings and dividends.
What will it mean for super returns and self-funded retirees?
Historic low interest rates are driving many retail investors and self-funded retirees into the share market. However, share prices are likely remain volatile for some time yet and there’s no guarantee of decent dividends at least in the short term.
Volatile share prices and falling dividends will have an impact on super returns but more importantly, smaller dividends, or none at all, may have a significant impact on the income of many self-funded retirees.
That’s why it’s so important in the current environment to get good financial advice before diving into the share market or switching to a riskier super investment option.
Markets at a glance
for the month ending 30 April 2020
Australian shares1 up by 8.78%
Australian Government Bonds yield2 up to 0.890%
Australian dollar up to US$0.6566
Cash rate3 steady to 0.25%
International shares4 up by 10.71%
1 ASX 200 Accumulation Index
2 Yield on 10 year Australian Government Bonds
3 RBA cash rate
4 MSCI – World ex Australia (USD)