Curve flattening but world still seeking shelter

Australia has seen positive signs emerging over COVID-19 infection rates but the prospect of an easing of lockdowns is tempered by dismal economic signals

10 April 2020 | Shane Oliver, AMP Capital (Image: Alex Block)

Share markets, with the exception of Europe, pushed higher again over the last week on ongoing signs the COVID-19 curve is flattening in a number of countries which is resulting in a move towards relaxing lockdowns amidst promising reports regarding anti-viral drug tests.

While Australian energy stocks were hit as oil prices fell, the local share market was pushed higher again by a strong global lead with particularly strong gains in IT, industrial, consumer, health and materials shares.

From their lows around 23rd March global and Australian shares are up by around 21%, which means they have recovered around 40% of the plunge from around 20th February. Despite the strength in shares, bond yields fell in the US, Germany and Australia as economic data worsened.

Oil prices fell as OPEC+ production cuts were judged to be not enough to offset the slump in global oil demand, but metal and iron ore prices rose.

Economic outlook remains bleak

After a powerful 20% plus rally from lows around 23rd March shares are a bit vulnerable in the short-term as the economic and profit news is likely to be pretty bleak over the next month:

Economic data now looks like it’s falling off a cliff with a record plunge in US March retail sales, plunging consumer and business confidence readings and signs of collapsing employment.

With the shutdowns really only getting underway in the second half of March, April data is likely to be a lot weaker than March data with unemployment in the US looking like it’s on the way to 20% and in Australia to around 10% (with JobKeeper wage subsidies helping to keep it down relative to the US).

While, it’s just catching up with market expectations the IMF’s updated forecasts for a 3% contraction in global GDP this year provided a reminder of the scale of the hit to the global economy, particularly given that this masks contractions in the US, Europe, Japan and Australia averaging around 6%.

To put this in context the GFC saw global growth contract around 0.1%. The scale of the IMF’s growth downgrade for this year makes the fine tuning of its growth forecasts over the last few years when growth ended around 3% look trivial!

Our own expectation is for advanced countries including Australia to contract by 10 to 15%, mainly concentrated in the June quarter.

This is all likely to drive a sharp 20 to 30% slump in profits and this is starting to become evident in March quarter earnings reports in the US.

At the same time the blame game looks to be ramping up in the US, with numerous signs pointing to this leading to a ramp up in US/China tensions, although this is mainly an issue for later this year in the run up to the Presidential election.

Positives for long-term investors

Beyond the near-term uncertainty there are a number of positives investors need to allow for which point to share markets being higher on a 12-month horizon:

First, evidence of coronavirus curve flattening is continuing, with new global cases trending sideways for two weeks now. (The volatility appears to reflect new French cases which seem to spike every so often.) Taking out the numbers for France, the EU appears to be seeing a downtrend in new cases.

The US looks to be following Italy with a two-week lag – although its yet to show a clear downtrend. Australia is at the other end of the spectrum as we look to be continuing to follow South Korea, which is one the best performing nations in terms of limiting COVID-19 infections.   

Among a list of 40 major nations, ranking of how well countries have grappled with coronavirus based on the percentage of cases that have recovered, total cases per capita relative to each countries outbreak duration, active cases per capita and tests per capita still ranks Australia at number 3, behind only China and South Korea.

Italy is ranked 27th, the UK is ranked 36th and the US is ranked 37th out of 40.

Looking towards easing lockdowns

Second, with various countries and regions including Australia following the pattern set by China that saw a peak in new cases around 11 to 21 days after its lockdown, which then allowed a relaxation of the lockdown a month or so later, the focus is now shifting towards an easing of the lockdowns.

Some countries have already announced some easing including Germany, Austria, Spain and Italy. The US has released guidelines for state and local governments to follow in a three phased easing process contingent on meeting various criteria including falling new cases and hospitals over a two week period before proceeding to each stage that could allow some states to reopen in a month.

Australia is a bit stricter with the PM saying that current restrictions will remain in place for at least the next four weeks and noting three criteria that need to fall into place: better testing; better contact tracing; and confidence in containing outbreaks.

Australia’s tougher approach makes sense given the risks around the coming winter and the absolute necessity of being far better at quarantining new cases going forward. But the bottom line seems to be that if the number of new cases continues to trend down an easing of the various lockdowns will be common from around May.

Cautious optimism on the virus treatment front

Third, pharmaceutical solutions could speed the easing of lockdowns and here there are two positive developments. 

There are reports that patients treated with Gilead’s anti-viral drug Remdesivir were seeing “rapid recoveries in fever and respiratory symptoms.”

Also, antibody testing for exposure to coronavirus is now starting up and may enable estimates of “herd immunity” and the provision of “immunity passports” for those who test positive to return to normal life. 

Australia may be approaching economic low point

If May starts to see a generalised and gradual easing in the lockdowns then April is likely to be the low point in economic data in Australia and other developed countries, much as February looks to have been in China.

If so, shares should then start to look forward to better times ahead, albeit it may still be a rough ride.

Finally, although policy stimulus announcements may start to slow for the simple reason that so much has already been done they are still continuing with progress towards another US fiscal stimulus and stimulus handouts to households on the way in South Korea and being considered in Japan.

Dr Shane Oliver is Head of Investment Strategy and Chief Economist, AMP Capital

0