Investors Take a Back Seat as Economic Fears Hit Home

Blog
Friday 24th April 2020

Investors Take a Back Seat as Economic Fears Hit Home

Blog
Friday 24th April 2020
Written by Chris Lioutas

Markets:

  • Local and global equity markets fell this week as concerns regarding the economic contraction began to be felt.
  • In local stock news, BHP’s iron ore production is on track to meet full year guidance whilst the company is reviewing their forecast for copper in light of the virus. The iron ore price continues to remain elevated on Chinese restocking, but it’s likely the iron price falls from here in light of limited demand ex-China as these countries take longer to recover.
  • Sydney Airport shares fell during the week after the company confirmed it wouldn’t pay a dividend, with traffic down 97% for the first 2 weeks of April.
  • National Australia Bank has indicated that 1st half earnings will be eaten away by $1.14 billion, including further remediation provisions.
  • Virgin Australia has entered voluntary administration and frozen its Velocity program for 4 weeks as suitors begin to circle. The Velocity business will be offered to buyers as part of the sale. Equity holders, largely foreign airlines and Richard Branson, will need to be wiped-out before the company can be recapitalised.
  • Oil prices fell sharply on fears suppliers will run out of places to store the commodity and that the excess supply may take years to work its way through. Normally, prices this low would add at least 2% to economic growth, but with no demand there are no savings. Oil producers will need to apply probably the largest production cuts we’ve ever seen to get the oil price higher.

Economics:

  • Australian retail sales surged by a monthly record of 8.2% in March as consumers rushed to stockpile groceries and office supplies ahead of lockdowns.
  • Analysis from Commonwealth Bank credit and debit card spend data shows a sharp decline in spending versus the same time last year. Spending across most categories remains very weak with the exception of household furnishings & equipment. If spending settles at these lower levels, it will leave a huge hole in our economic growth.
  • Data from the Australian Bureau of Statistics shows the true unemployment rate to be closer to 8%, and could head as high as 10-15% in the coming months, whilst remaining elevated for an extended period thereafter as households scale back spending and businesses shed staff permanently.
  • US jobless claims topped 26 million in the past 5 weeks, but slowed somewhat last week compared with the previous week. The 26 million in lost jobs wipes out all jobs created since the GFC.
  • Chinese 1st quarter economic growth contracted 6.8% from the same time last year and fell 9.8% on the previous quarter, whilst March credit data increased to its fastest pace since mid-2018 and new credit flowing into the economy rose to levels on par with 2017.
  • Chinese monthly data also showed that factory output was rebounding faster than the service economy, with industrial production only down by a small amount and retail sales down almost 16%. The Chinese rebound seems unsustainable given the sharp fall in demand ex-China.

Politics:

  • New guidelines from the White House showed no firm dates for lifting restrictions but did recommend states first show a 2-week downward trend in infections, as part of the three-stage process, before slowly lifting restrictions. President Trump remains very anxious to reopen the economy as soon as possible but also doesn’t want see restrictions put back in place after they have been lifted.
  • The US Senate has approved an emergency US$480 billion relief package, after the initial US$350 billion package for small business was exhausted much quicker than expected.
  • The US government agreed to defer the collection of tariffs from US importers in relation to some Chinese goods in an effort to ease their financial situation. Problem is, according to President Trump, the burden of the tariffs was supposed to be felt by China.

French President Emmanuel Macron has renewed calls for the Eurozone to issue joint debt as part of the European effort to recover from the virus. Without some sort of fiscal union, the EU is in a fair amount of strife from here.


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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