Investor sentiment sours on poor economic data

Blog
Thursday 14th May 2020

Investor sentiment sours on poor economic data

Blog
Thursday 14th May 2020
Written by Chris Lioutas

Markets:

  • Local and global equity markets fell this week as poor economic data overwhelmed investor sentiment, which was also hit by concerns regarding rising virus infection rates on some countries re-opening.
  • In local stock news, Scentre Group (Westfield Australia) announced that 57% of shops in their centres were open. Premier Investments, owner of retail brand such as Just Jeans and Peter Alexander, announced that all their stores would reopen this week whilst highlighting a surge in online sales during the most recent period. Its NZ stores remain closed.
  • Macquarie announced that full year earnings had only fallen 8%, showing the resilience in their business model post GFC. The Group also announced a new hybrid security issue with significant interest from institutional investors.
  • Commonwealth Bank reported a $1.3 billion cash profit for the 3rd quarter. The bank also announced that private equity giant KKR would be acquiring 55% of their wealth business, Colonial First State, for $1.7 billion, with the bank retaining a 45% holding.
  • The oil price rose strongly again on potentially faster than expected pick up in demand given countries began to re-open their economies.

Economics:

  • The value of Australian retail trade rose strongly in March, surging by 8.5%, which was the strongest monthly rise on record. Spending on food and household goods was incredibly strong, with eating out, clothing, and department stores incredibly weak. The problem is in the rush to hoard and work from home, we got gouged – ie. retail trade volumes are only marginally positive, so we paid a lot more for the same goods we always buy under the guise of limited supply.
  • The Australian unemployment rate rose to 6.2%, coming in much better than expectations. The problem is the headline number doesn’t come close to telling the real state of affairs. The participation rate (those in work and those actively looking for work) fell through the floor as almost 500,000 left the labour force, thus masking a much higher unemployment number, which would’ve been above 9% had the pre-virus participation rate been used. Around 1 in 5 employed people have either left employment or had their hours reduced, with the underemployment rate rising almost 5% to 13.7%. Absent JobKeeper and JobSeeker, the numbers would be even worse (circa 15% plus unemployment).
  • The RBA is forecasting a sharp drop in economic growth this year before a rather sharp rebound in ’21 and ’22. The sharp rebound is anyone’s guess right now. They also have inflation remaining low and below target out to ’22 which means we won’t see any upward pressure on rates until at least 2023. Lastly, they are forecasting a sharp rising in unemployment to 10% this year, with falls back down to 6.5% in 2022. The unemployment rate was 5.2% pre-virus.
  • US jobs data continues to worsen with more than 36 million now having filed claims for unemployment benefits. The unemployment rate rose to almost 15% and that was with the participation rate falling, which means the unemployment rate is much worse than the 15% suggests. Analysis shows that 40% of households earning less than $40,000 a year lost a job in March.
  • The US central bank chairman Jerome Powell has maintained that negative interest rates aren’t being considered. This is in stark contrast to market pricing which is implying that the bank will cut rates to below zero next year. The Australian central bank chair has also maintained that negative rates aren’t being considered, but chairs aren't in a position to rule anything out right now.
  • Chinese data showed a sharp drop in their factory prices, which was to be expected. Whilst factories are back almost at full capacity, limited to no demand from the West (given we’re still in lockdown) will result in massive amounts of supply unless factory output is curbed. Problems for China.

Politics:

  • Anti-China rhetoric ramped up geo-political risks this week, with China threatening, and in some cases carrying through, with the threats to boycott Australian barley and meat. Education could be next.
  • US President Trump ramped up his anti-China rhetoric by asking the federal pension fund to exclude Chinese equities from its holdings and pushing the securities regulator to look at banning and potentially removing Chinese listings on US stock exchanges. Whilst abandoning the phase 1 trade deal looks unlikely, President Trump has asked for ways to raise tariffs without breaking promises in the phase 1 deal. He may also be looking at strict enforcement of the phase 1 deal which would be significantly difficult for China to meet without hurting their economy.
  • In contrast, China is opening up its financial markets further to foreign investors and trade talks between US and Chinese officials have begun and look relatively healthy at this point. China might be playing hardball on the anti-China front, but they will need to significantly open their economy and their financial markets ahead if they are to prosper and meet their targets.

Countries that have begun to re-open have reported an increase in new Covid-19 infections. This is to be expected. The virus can’t and won’t disappear. Even a vaccine won’t assist as vaccines aren’t mandatory and vaccine safety takes considerable time to achieve. The actions of governments are now even more critical – ie. if they stall the re-opening, or go back to lockdown, no amount of stimulus will stop the economic carnage that will take place. 


Author 

Chris Lioutas, Director, Insight Investment Consultants

Chris holds the position of asset consultant for Maxim Advisors and is a current sitting member of Maxim's investment committee. 

With permission of the author, this article is presented by Maxim Private Clients Pty Ltd ASFL No. 511972


Maxim Private Clients Pty Ltd ABN 47 611 614 398 AFSL No. 511972

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