The past financial year was poor for investors as coronavirus knocked economies into what is likely to be their biggest hit since the 1930s. Shares were hit hard, but the blow was softened by a strong rebound in the June quarter. This note reviews the last financial year and takes a look at the outlook.
The past financial year can effectively be divided into two halves. The period from July last year into early this year saw generally strong returns from shares and growth assets, as fear of recession faded helped by central bank easing and a truce in the US/China trade war and gave way to expectations of some improvement in global economic growth. Despite devastating bushfires and a subdued growth outlook even the Australian share market made it to a record high in February. Against this backdrop, returns from government bonds were subdued.
This now seems like it was a different world as it all started to fade and ultimately reverse as the coronavirus epidemic started to become a problem in China in January. Initially it was hoped it would be contained to China (which successfully controlled it allowing a reopening of its economy from March) but from late February the number of cases escalated in Europe then the US, Australia and ultimately emerging countries, resulting in severe lockdowns driving sharp economic contractions in economic activity. So, between 20th February and 23rd March share markets collapsed by around 35% dragging down commodity prices. This also saw the $US surge and the Australian dollar plunge to around $US0.55.
However, from late March shares staged a rebound driven by policy stimulus, a decline in new covid cases, economic reopening and a rebound in economic data. From their March lows to June highs global shares rose 40% & Australian shares rose 35% and commodity prices and the $A also rebounded.
So, despite this wild ride, for the financial year as a whole global shares returned 5.2% in Australian dollar terms. This was led by the US share market which outperformed due to a heavy tech and health care exposure, a relatively low exposure to cyclical shares and massive Fed quantitative easing. Australian shares didn’t fare so well & still lost 7.7% for the financial year.
Cash and bank deposits had very low returns as the RBA cut the cash rate to 0.25% in March. But bonds had reasonable returns as plunging yields provided capital growth for investors. Despite the plunge in interest rates and bond yields, listed property saw double digit losses as the coronavirus driven slump in economic activity pushed up vacancies and depressed rents in retail and office properties. Returns on airports were similarly depressed weighing on direct infrastructure returns.
This all saw small negative returns for balanced growth superannuation funds of around -1.5% after fees and taxes. Of course, it would have been much worse were it not for the June quarter rebound in shares. The hit to super returns also followed several years of strong returns and the five-year average is just over 5% which is not so bad given (pre tax) bank deposit rates averaged around 2% and inflation averaged 1.5%.
Source: Thomson Reuters, AMP Capital
Like shares, Australian residential property had a roller coaster ride – first rising 10% on rate cuts and the Federal election before starting to slow as coronavirus hit.
There are a bunch of threats which are likely to lead to a further correction in shares in the short term, ongoing bouts of volatility and constrained returns. Here are the big ones.
However, there are a bunch of positives providing an offset.
Source: Bloomberg, AMP Capital
Source: RBA; AMP Capital
With coronavirus risks still high, investment markets may see more volatility. But over the next 12 months returns from a well-diversified portfolio are likely to be constrained but okay.
Loans and guarantees are helpful but they leave businesses more indebted, whereas actual fiscal stimulus provides a direct boost. So actual fiscal support is a better measure and on this front Australia at 10.6% of GDP has provided by far the strongest fiscal stimulus of G20 countries. What’s more, Australia’s centrepiece JobKeeper wage subsidy is superior to approaches taken by many other countries as it keeps people “employed”, minimises confidence zapping negative headlines around unemployment, preserves the employer/employee relationship, keeps workers getting paid and provides a subsidy to struggling businesses. Unemployment is likely to rise to around 10% which is bad, but its far better than the 15% that would likely occur in the absence of JobKeeper or 20% or so unemployment in the US.
The key things to keep an eye on are: coronavirus hospitalisations and deaths, as a guide to the degree of isolation; global business conditions PMIs and unemployment; US election prospects; and Australian house prices.
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Article by AMP Capital
This article was prepared by Dr Shane Oliver. Dr Shane Oliver who provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.
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