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Economic and market update

June 2020

2019 was an unusually strong year for returns with growth assets such as shares, and defensive assets such as government bonds both delivering returns well above their long-run averages. Most growth assets were generally priced above their fair value, so we ended the year cautious about a possible correction ahead.

Then, on 31 December 2019, China began reporting cases of a new virus, COVID-19 (coronavirus) that began in Wuhan, Hubei Province. The developed share markets initially shrugged off these early reports and continued to rally during January 2020 and into the first three weeks of February. This rally reflected the fact that central banks had continued to lower interest rates during 2019 to keep investment and growth high and avoid a sharp slowing in activity. As a result, the markets believed the risk of a recession was steadily falling.

As COVID-19 spread globally at an alarming rate into March, particularly in Italy, markets and governments became much more concerned that the virus would spread into a global pandemic. By mid-March this fear had become a reality.

Why did the markets fall so dramatically?

While the COVID-19 pandemic began as a global health crisis, the lockdown and isolation measures designed to control the spread have impacted a wide range of industries across the globe.

As a large variety of goods are ‘Made in China’, city and factory closures in China hit global supply chains hard, restricting business activity across many sectors.

Travel and tourism industries have also been badly damaged, with airlines grounding flights and people required to cancel business trips and holidays. The reduction in the demand for travel and the lack of factory activity also impacted demand for oil, causing its price to fall. The oil price had already been affected by a dispute between OPEC, the group of oil producers, and Russia. COVID-19 has driven the price down even further.

Other sectors impacted by isolation and lockdown measures include sport and hospitality, cafes and restaurants, gyms, hotels, cinemas, transportation, entertainment and the arts, retail and construction. All up, the economy has been put into somewhat of a ‘deep freeze’ and this has led to rising unemployment. In the United States, the number of people filing for unemployment hit a record high with 6.6 million people filing jobless claims in the week ending 28 March. This signaled an end to a decade of expansion for one of the world's largest economies.

Reaction by policy makers

Central banks and governments have moved swiftly and strongly to allay investor fears and increase market confidence by announcing large fiscal and monetary policy support.

Australia’s Prime Minister Scott Morrison announced several stimulus packages in March. These included $17.6bn for welfare and wage subsidies, a $66bn plan with a $550 coronavirus supplement to JobSeeker payments and payments to welfare recipients. A third $130bn JobKeeper support package included $1,500 for employers to pass onto employees to keep them in work.

In the US, the Federal Reserve (the Fed) decided to cut their main interest rate to near zero and began buying government bonds to add money directly into the economy in a dramatic shift in policy settings. President Donald Trump also deployed a huge USD$2.2 trillion COVID-19 stimulus package which includes an emergency universal income payment of USD$1,200 for every adult who makes under USD$75,000 a year. Several European countries and the UK have also implemented stimulus packages.

These enormous fiscal and monetary responses, and some considerable success in flattening infection curves, have resulted in share markets in most major countries clawing back some of the March losses.

Where to from here?

Many countries are now starting to shift from the lockdown and isolation measures that have flattened infection curves to managing the first steps to re-opening economies. The degree of re-opening varies greatly depending on the level of success achieved in maintaining flat infection curves. Markets will be watching closely to determine which countries are better able to manage this next phase.

It’s understandable that the news headlines can cause a feeling of panic, but it’s important to take a calm and considered approach to your investment portfolio and superannuation. A long-term focus is critical during times of market turbulence and history has shown, time and again, that markets have the ability to recover from significant market downturns.

“Whilst the share market was extraordinarily strong in 2019, which led to markets being somewhat expensive, COVID-19 acted as a catalyst for markets to correct. As the pandemic spread throughout the world, it has caused considerable disruption to communities, economies and markets in 2020. Whilst this can be alarming, it’s important to remember that super is generally a long-term investment and we position portfolios judiciously to protect our investors and maintain a well-disciplined, diversified investment strategy to see us through the current market volatility” said OnePath Portfolio Manager, Liam Wilson.

Speak to your financial adviser if you still have concerns. They’re well placed to understand your complete financial situation and talk you through your investment strategy.

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