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Somewhere over the (COVID-19) rainbow

September 2020

 

A profound recession but blue skies may be ahead

COVID-19 has shaken society and caused immeasurable human tragedy. Infection and death rates seem to be slowing but are still stubbornly high and pockets of infection continue to bubble up.

In addition to the human trauma, the global economy has been left stunned by the lockdown and isolation measures put in place to contain the virus. We expect to see a sharp contraction in economic growth, as measured by GDP, for the June quarter.

Gross Domestic Product (GDP) explained

GDP is the total value of all the goods and services produced by a country in a specific timeframe (usually looked at quarterly).

It’s a broad measure of overall domestic production so it’s a good measure of a country’s economic health.

All up, the scale of the current global recession is significant, with economic activity almost grinding to a halt. We can liken the severity of the current episode to the Great Depression, but the pace of the downturn has been incredibly fast in comparison. Also in contrast to the Great Depression, we consider that negative economic growth may be more of a short-term outcome, confined to 2020, rather than something that could continue for years to come. That said, in some emerging markets, where containing the virus spread has been particularly challenged, economic weakness could be prolonged.

Can the economic troubles melt (like lemon drops)?

At the centre of the economic damage is the impact to consumers and businesses, but governments and central banks have been very swift to respond to mitigate against any more permanent economic damage. In the U.S. the government delivered a multi-trillion-dollar fiscal package and Australia’s government has provided $289 billion in fiscal and balance sheet measures, equivalent to around 14.6% of GDP.

The huge support packages have offered short-term support to individuals and businesses, and while it hasn’t prevented the global economy from falling into a sharp recession in terms of lost output and higher unemployment, it is likely to allow households and companies to avoid the worst effects until a vaccine has been developed and the economy can start to recover. That said, the stimulus has come with a huge burden which will see the global economy with a debt to GDP ratio higher than after World War II by the end of 2021.

Signs of sunshine

Signs of economic recovery can already be seen. While severe floods have somewhat impacted China’s recovery, industrial production has picked up and unemployment is flat. In the US, 42% of the 22.1 million jobs lost between February and April have been regained and retail and industrial activity looks to be resuming. In Australia unemployment has risen to 7.5% but the economic support package seems to be working. Global business survey data, most often termed Purchasing Manager Indices (PMI), has also lifted solidly, a good indicator that production levels are expected to improve.

Many traditional economic indicators have been unable to ‘keep up’ with economic realities as the recession happened so quickly. Higher frequency (daily) data that is produced by technology applications on smart phones that track day-to-day travel and purchases by the household sector have been useful indicators that have shown that economies are ‘opening up for business’ again. Apple transport data shows that driving and public transport has recovered from the mid-March low. Things like travel and restaurants, as measured by U.S. seated dinners and TSA traffic, still show little signs of recovery. Hotel occupancy remains low.

Are share markets wishing ‘upon a star’

If we use the S&P 500, a measure of the US’s top 500 companies, there has been a huge rally of over 30% since the recession low of March 2020. This has been driven overwhelmingly by growth stocks including tech giants such as Amazon, Facebook, Apple and Netflix. Markets seem to have been be comforted by the massive support governments and central banks have provided and the pickup in business survey data.

When we assess all of the indicators, data now suggest that share markets have captured the initial bounce and are now consolidating. That said, it could be a bumpy ride with risks such as another spike in infection rates (which would delay reopening efforts), bad news about vaccine trials, an escalation in US/China tensions or US election uncertainty. But there are plenty of positives to offset with monetary and fiscal policy remaining very easy which will continue to provide meaningful support to sharemarkets.

While we’re not quite ‘over the rainbow’, it can be a nervous time for investors. If you’re feeling concerned about your investment strategy, don’t go it alone. Professional financial advice can support you to assess if you’re still on track to reach your financial objectives and help you to avoid any costly investment mistakes.

Data sources: JP Morgan, Economic Update 24 August 2020, IOOF, Fact Set
Song references: ‘Over the rainbow’ from Wizard of Oz, composed by Harold Arlen with lyrics by Yip Harburg, 1938

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This publication is issued by ‘OnePath’ (OnePath Funds Management Limited ABN 21 003 002 800 AFSL 238342 - OnePath Funds Management and OnePath Custodians Pty Limited ABN 12 008 508 496 AFSL 238346 RSE L0000673 – OnePath Custodians). This article contains general information and may also contain professional opinions which are given in good faith and based on information and assumptions believed to be reliable as at 24 August 2020. The author makes no representation as to its accuracy or completeness and the information should not be relied upon as such. Any opinions, estimates and forecasts herein reflect the authors’ judgments on the date of this publication and are subject to change without notice.

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