Market Wrap March 2020

08/04/2020
Posted in Wealth
08/04/2020 Level One

Markets

  • Market Performance – The ASX200 experienced a decline of 20.7% over the month of March.
  • Global – The S&P500 fell 12.4% in March.
  • Gold prices were volatile in March but reached their highest level at one point since 2013 at $1,608.95/oz.

 

Property

  • House Prices – Sydney and Melbourne house prices rose 1.1% and 0.5% respectively over the month of March.
  • Residential building approvals jumped in February to 188,000, the highest level in a year. This was driven primarily by unit developments where house approvals were flat.
  • Since the June 2019 low, prices have climbed 8.3% nationally.
  • UBS forecast residential property prices to fall 10-20% over the next 12 months.
  • Property sales volumes will collapse in coming months as long as the ban on auctions and open house inspections continue.
  • The extent and duration of price falls is very uncertain given the hit from demand expected from the looming recession and the rise in unemployment that will accompany it.
  • Damage to the property market will be insulated from the governments enforced 6 month deferred mortgage repayments which will prevent a lot of forced sales.
  • If property prices do fall significantly with the subsequent economic impact that would follow there is likely to be further government support in the form of: expanding the first home buyers scheme; the introduction of First Home Owner grants; reductions in State Government stamp duty and land tax; or support for the build-to-rent industry.

 

Economy

  • Interest Rates – The RBA cut interest rates to 0.25% in March. This is the lowest rate recorded in history.
  • Bond Yield – The Australian 10-year Government bond yield fell over the month of March to 0.76%.
  • Consumer Confidence Index – ANZ Roy Morgan weekly consumer confidence index fell approximately 40% in March its lowest since data was collected in 1973.
  • Employment – Employment increased by 26,700 jobs in February. The unemployment rate fell to 5.1% in February.
  • Exchange Rates – The Australian Dollar fell against the US Dollar at March end to $0.612 but fell to only $0.55 at its lowest point in the month.
  • US – US jobs growth increased by 273,000 in February.
  • US Federal Reserve – Cut interest rates from a 1.5-1.75% range to 0-0.25% range and announced the Fed would buy unlimited Treasury Bonds and mortgage back on securities.
  • PMI – The US Manufacturing Purchasing Managers’ Index fell to 50.1 in February from 50.9 in January. March has come in at 49.1.
  • China – China PMI (purchasing manufacturing index) also collapsed from 50 to 35.7, worse than GFC levels in February but bounced back to 52.0 in March.
  • Oil prices fell sharply in March on fears of reduced global demand due to a COVID 19 induced slowdown and an increase in OPEC production. Brent crude oil prices dropped to a 17 year low of $22.74 per barrel.
  • Stimulus packages announced so far from the Federal Government amount to $213.6 Billion plus to combat the effects of the COVID19 downturn.
Sources: UBS, Westpac, S&P Dow Jones Indices, ABS, US BLS, CoreLogic, BIS Oxford Economics.

 

Comment

The Coronavirus outbreak has reached every corner of the globe and governments around the world are taking drastic measures to contain the spread. Uncertainty remains about the duration and severity of the outbreak, but it is certain that the drastic policy measures taken will have a devastating and lasting economic, psychological and emotional impact.

Fiscal and monetary policy makers have taken steps to mitigate the negative impact on companies and households. These measures will cushion the adverse effects on growth but cannot prevent the coming downturn.

Drastic restrictions on movement and public gatherings are an important step in limiting the further spread of the virus. We must all do our bit.

Global growth is slowing rapidly.

What is extraordinary is that initial reports seemed to indicate China would go from normal activity to mass disruption and lockdown to almost full recovery – or say 85% thereof over a period of about 2 months.

Interestingly there have been some reports that Chinese infection rates could be rising and restrictions reintroduced. Time will tell.

China obviously enjoys the benefit in these circumstances of a completely centralised government system where people are controlled a lot more easily than in the democracies enjoyed in Europe, America, most of Asia and Australia.

Western governments obviously cannot shut down society and the economy like China can and accordingly such a rapid recovery should not be expected in the west.

On Friday UBS revised down their real GDP forecast for 2020 to a negative 6.1%

This is by far the worst since World War II.

In addition, UBS estimated unemployment was likely to peak to 10.5%, similar to past recessions or over 1 million people.  (Goodman Sachs forecast unemployment to peak at 8.5%).

Importantly, total Australian Government Debt will exceed $1 trillion.

While Scott Morrison talks of a six month period of restrictions the NSW Police Commissioner says we will be in our current mode of lockdown for at least 90 days.

The effect of this on people’s lives is only beginning to unfold.

The Australian Share Market has been hit significantly with the market having dropped by 35% in early March and is currently down 27% having rallied 8% in recent days.

For the long-term investor, the message is clear that you don’t sell and crystallise losses in down markets.

Our focus over the next few months will be on 2 things.

a)  Reduce Cash and Fixed Interest holdings were appropriate

  • Investors should have cash or fixed interest investments they can access in the event they require funds. We call this “rainy day money”.
  • Furthermore, any excess cash or fixed interest investments can be invested into this crash over the coming months. We call this “dry powder”. While the return on these funds in recent times has been minimal we can now put these funds to work.
  • As our clients term deposits mature, we will be speaking to you about this further.
  • Purchasing stocks now or over the coming months at attractive prices will ensure good returns in the years ahead.

b) Look to remove stocks that may not come out of this crisis in a favourable position

  • The world is changing rapidly and no doubt some industries and businesses will suffer more than others.
  • If we sell a stock and replace it with another that is better placed to trade successfully after this pandemic is over the better the returns will be going forward.

In making these decisions we must look forward and assess the future prospects of a company’s potential and not look back. The future for each and every company has changed. The past is the past and we must keep a laser like focus on the path ahead.

Remember that the health data coming out from different countries is the most critical issue here. Once the health data indicates that we have achieved peak infection rates we will then focus on the economic data. The economic data will bottom out in a few months time and will always lag the health data.

We will be in recession for probably about 6-9 months and then we will see signs of improvement from there.

Please feel free to call our office to discuss your portfolio or personal circumstances at any time.

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