Investors nervous as easing of virus restrictions halted

Blog
Friday 26th June 2020

Investors nervous as easing of virus restrictions halted

Blog
Friday 26th June 2020
Written by Chris Lioutas

Markets:

  • Local and global stock markets fell this week as some countries were forced to halt reopening plans whilst others were re-imposing some restrictions.
  • In local stock news, Woolworths expects full year earnings before interest and tax to come in below last year’s numbers, even with all the panic buying and changed dining habits, as higher costs hit home. Trading in the June quarter continues to be strong with Australian food sales up 8.6%, whilst sales at Big W and its drinks business in the 10 weeks to June 14 are up 27% and 21% respectively.
  • TPG shareholders have voted in favour of a merger with Vodafone Australia. The $15 billion merged entity is expected to create a stronger rival for Telstra and Optus, in contrast the takeover panels’ initial objections to the merger on competition grounds.
  • Qantas has launched a near $2 billion equity raising to provide much needed cashflow and further balance sheet strength. The company also confirmed that 6,000 jobs will go, and that a further 15,000 workers will be stood down for at least the rest of the year. Absent JobKeeper and remaining leave entitlements, these workers won’t receive any pay. They’ve asked the government to consider extending stimulus programs.
  • CSL has agreed to acquire a US gene therapy company for more than $650 million and could potentially pay up to $2.9 billion for the company. The therapy is for haemophilia B where it may help people with the blood clotting disorder to stop bleeding. The therapy is currently in phase 3 trials.
  • The oil price fell this week on concerns regarding a virus resurgence and on a surge in US inventories with a near six times increase versus economist expectations.

Economics:

  • Australian retail trade surged by 16.3% in May after a massive 17.7% plunge in April, coming in well above expectations. Large rises came from clothing / footwear / personal accessories and cafes / restaurants as lockdown restrictions were lifted in May. Consumer confidence is improving, but off a low base.
  • Australian manufacturing and service activity has rebounded in June, moving into expansionary territory for the first time since January. The move higher on the previous month is a function of reopening, but overall activity remains well below pre-virus levels.
  • The minimum wage in Australia will rise by $13 a week to $754 a week or nearly $20 per hour from 1 July. The rise is well below the 3% increase last year and the 4% requested by the unions, but well above that requested by business groups and the government. Yes, paying people more will help with consumption but not if it results in people losing their jobs because their employer can’t afford to pay them anymore.
  • Two thirds of Australian businesses have collected less revenue than this time last year due to lockdown restrictions. Education, training, accommodation, and food service providers the most affected. More than 30% reporting less revenue have seen revenues fall by 50% or more.
  • European leaders continue to discuss a proposed rescue package worth $3 trillion, with leaders agreeing to meet in person in mid-July to get a long-term budget across the line.
  • Some evidence from Europe that their economy may be stabilising with services and manufacturing output rebounding sharply but remaining in contractionary territory.
  • The global chief economist at Citi has said that the recovery we’re now seeing is unsatisfactory even with the substantial and appropriate government and central bank responses and that more needs to be done. Future stimulus must be focused on the supply side of the economy and productivity growth in the economy if we are to get back to where we were pre-virus and where we need to be going forward.

Politics:

  • Victoria has re-imposed some lockdown restrictions following a rise in virus contractions. The sources of the spread are unconfirmed but likely to be the protests and less physical distancing than was required. Once protests were allowed the state effectively flagged to everyone else that being careful was no longer warranted. 
  • PM Scott Morrison has said that his cabinet is currently working on whether the government’s stimulus packages extend beyond their current cut-off dates. He indicated that an announcement will be made in mid to late July. Given the current state of the economy, and projected job losses, it doesn’t look like he has much of a choice.
  • Virus contraction rates globally have been mixed with the US now experiencing a rise in cases (particularly in the south) not seen since April, Brazil passed the 50,000 deaths mark, whilst the UK announces further reopening and China looks to have successfully contained last week’s outbreak in Beijing following a strong response from the government.
  • Both sides of US politics are likely to propose a large infrastructure plan in the coming weeks as many household and business aid programs come to an end in July. President Trump has indicated that he supports the idea of extending or providing a new round of stimulus.
  • There were some concerns early in the week regarding the US-China trade deal as a US trade adviser said that the deal was “over” in a conversation that had previously mentioned the Chinese reneging on pledges to buy US farm products and the general deterioration in US-Chinese relations. However, President Trump remarked that the trade deal is intact, and he expects the Chinese to live up to the terms of the agreement.

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

Disclaimer: This material has been prepared without considering any potential investor's or clients objectives, financial situation or needs. This article is of a general nature and does not consider the individual circumstances of its recipients. Any information contained within this publication should not be misinterpreted as advice in any way. Please consult your financial advisor should you have any questions or concerns