Market Wrap May 2020

Posted in Wealth
09/06/2020 Level One


  • Market Performance – having risen by 8.8% in April the ASX200 continued to climb rising 4.4% in May.
  • Sector Performance – IT (+7.7%) Materials (+6.7%) & Industrials (+6.4%) sectors outperformed.
  • Global – in the US the S&P500 index rose 4.8% after a 12.8% jump in April.
  • Gold – continued its strong rise to another all time high of $1,728.70/oz, an increase of over $25.00 in the month of May.
  • Iron Ore – rose to $101.50/ton with strong demand continuing and supply from Brazil being hindered by COVID 19.
  • Oil – rose to US$35.33/bbl as at the end of May from $25.27 at the end of April.



  • Housing – dwelling prices dropped 0.1% in May.
  • Home Sales – CoreLogic estimate sales activity bounced back 15.5% in May after a decline of approximately 30% in April.
  • Property Prices – national home values remain 8.3% higher than they were a year ago. While Sydney is up 14.3% and Melbourne up 11.7% Perth was down 2.1% and Darwin down 2.6%.
  • National Rental Index – rose 0.2% over the month of May following a decline of 0.4% in April.
  • Inter City Apartment Rents – with a large number of new inner city apartment projects being recently completed or due to complete soon, along with stalled migration and frozen foreign student arrivals rents are more likely to continue to fall in the inner city apartment sector. Significant job losses in the hospitality, tourism and arts sectors will also exacerbate this.



  • Interest Rates – on hold at 0.25%.
  • Bond Yield – Australian 10-year Government bond yields were steady at 0.88% while US Government 10-year bond yields dropped only 3 bps to 0.64%.
  • Consumer Confidence – the Westpac-Melbourne Institute of Consumer Sentiment jumped to 88.1 in May up from 75.6 in April as COVID 19 containment and lockdown restrictions were being slowly lifted.
  • Exchange Rates – the Australian Dollar was steady against the US Dollar at 0.664.
  • Unemployment – rose in April from 5.2% to 6.2%, representing 600,000 lost jobs in the month. June will see significant further job losses.
  • Chicago Purchasing Managers Index (PMI) – sank further for the 11th straight month to 32.3 as business confidence continues to contract in the US.
  • JobKeeper Program – the anticipated cost to the Federal Budget was revised down from $130 billion to $70 billion. While it had been reported recently that the scheme was covering some 6.5 million employees that number has been reduced to only9 million.
  • Recession – GDP growth was a negative 0.3% in the March quarter in Australia. June is likely to be a lot worse resulting in 2 consecutive quarters of negative GDP growth. This is the strict definition of a recession. It is likely we could get 4 consecutive quarters of negative growth or more in what many predict will become our worst recession since the Great Depression in the 1930’s. We are only just beginning to see this play out in the economy, but one thing is for sure – it is going to get a lot worse before it gets better.
  • US Jobs – 20.5 million jobs were lost in the month of April representing 14.7% of the workforce. It is expected the unemployment rate will rise above 20% once May’s data is collated.
  • German Factory Orders – have fallen by 25% in the months of March and April.
  • French Consumption – of goods have fallen by 20% in April following a decline of 16.9 in March.
Sources: UBS, Westpac, S&P Dow Jones Indices, ABS, US BLS, CoreLogic, Morningstar.


Comment – Uncertain Times

The rally in equity markets over the past 2 months has many equity strategists and research analysts confounded. Given the level of opaqueness in corporate Australia right now, the basis for this rally in Australian equities are leading to the conclusion that a “V” shaped recovery is already being priced in (as opposed to a U or L shaped recovery).

Delving deeper and looking at earnings and market multiples of the ASX 200, we see that the market is looking through most of the negative news and focusing on a recovery in FY-2021. According to UBS, earnings growth for the ASX 200, FY20 is predicted to fall 21.4%. If you recall, at the height of the pandemic in March and April, the market was calling for a minimum of 25% earning revisions and potentially 30% which was more likely of a typical recession. The fact the revisions are now being considered less harsh could be considered a positive for equity markets, but it still begs the question of what price do you pay for these earnings.

In February when the ASX 200 hit its intraday record high of 7197, the market was on a PE (Price Earnings Ratio) of just over 19 times. No doubt the impact of the so-called growth stocks had a major part in dragging the average PE higher with CSL on over 50 times and the Tech and Info-Tech sector at even more lofty multiples. Before the impact of COVID-19 and the fall in equities, many were asking is this too high a price to pay? The level of doubt was tangible, with many funds sitting on high levels of cash, in the expectation of some form of correction. Despite not picking the cause (COVID-19) the effect on markets was a significant correction and a new level of doubt surrounding corporate earnings for 2020 and in most respects 2021.

This doubt on company earnings still remains as we edge closer to reporting season in August. Yet the market is now pricing the ASX 200 on a PE of 18.2 times.

With record government spending and extremely low or negative interest rates around the globe, time will tell as to whether the markets will rally higher into a “new normal” or crash back to more historic levels as the economic carnage of the Coronavirus plays out along with a deterioration of Chinese relations with numerous countries around the world.


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