Delta dawns

Lockdowns, economic activity down and uncertainty rise with spread of the COVID-19 Delta variant

1 August 2021| Shane Oliver, AMP Capital (Image: Marcus Reubenstein)

Global share markets fell over the last week, not helped by concerns about Chinese regulatory tightening, a likely slowing in tech sector earnings growth and ongoing worries about a resurgence in coronavirus cases. US shares fell -0.4%, Eurozone shares fell -0.2%, Japanese shares lost -1% and Chinese shares fell -5.5%.  The Australian share market made it to a new high early in the week but ended the week flat. Bond yields mostly fell, helped in Australia by benign June quarter inflation. Oil and metal prices rose but the iron ore price fell. The $A fell despite a fall in the $US. 

Shares remain at risk of a short-term correction or volatility as coronavirus cases rise globally, the inflation scare continues and as we come into seasonally weaker months, but surging company profits in the US and lower bond yields are providing support and in any case the rising trend in shares is likely to remain in place into next year as rising vaccination rates allow economic recovery to continue as interest rates & bond yields remain low.

Global new coronavirus cases continued to rise over the last week with the Delta variant being the main concern. 

The resurgence of coronavirus in the US is now becoming more of an issue with new cases and hospitalisations surging in many lowly vaccinated states, eg hospital admissions in Florida are now surpassing the peak in January, Arkansas has declared a public health emergency with its hospitals overwhelmed and Texas is running low on ICU beds. This is starting to see a return of restrictions mainly in terms of mask mandates along with delayed returns to the office along with increasing vaccination mandates for workers. The Delta variant is now accounting for more than 80% of new US cases. Even China is having problems with the Delta variant.

However, the UK which remains an important test case given its relatively high level of vaccination has continued to see hospitalisations and deaths remain far more subdued in the latest wave of new cases providing confirmation the vaccines are highly (90% plus) effective in preventing the need for hospitalisation and death. It’s the same story in Israel and Europe. And deaths remain subdued in the US. The UK has also seen a surprising fall in new cases, but its unclear whether this will be sustained or not as the number of tests has declined but the positive testing rate is still rising and new cases have started to rise again in the last few days. 

On the latest count 29% of people globally and 57% in developed countries have had at least one dose of vaccine. 

New targets for Australia

Australian governments have agreed a national plan that would see a move from the current “suppression” of the virus phase to a “transition” phase with less restrictions and less city and state lockdowns once 70% of the adult population is vaccinated and then to a “consolidation” phase with only targeted lockdowns and greater international travel once 80% of the eligible adult population is vaccinated.

So, we have a way to go yet. In the meantime, we have little choice but to continue with restrictions and snap lockdowns to limit pressure on the hospital system and prevent deaths following outbreaks. But the key is that the lockdowns be implemented hard and early to ensure that they are short with minimal economic impact.

The economic impact of the lockdowns continues to be evident in another fall in our Australian Economic Activity Tracker over the last week reflecting falls in all of its components.

The Australian June half profit reporting season will start to get under way. Consensus earnings per share growth expectations are for a 49% rise in earnings for 2020-21 and a 56% rise in dividends. The resources sector is expected to see a near doubling in profits (as evident in Rio’s already released result) followed by 58% growth in bank earnings and a 47% gain in media sector profits. Telcos, general industrials and utilities are likely to see a decline in earnings.  Outlook statements are likely to be cautious though given the uncertainty posed by recent coronavirus outbreaks and lockdowns, particularly that in NSW. Only 11 major companies will release results in the next week though including GUD, Newscorp, REA and Resmed.   

Outlook for investment markets    

Shares remain vulnerable to a short-term correction with possible triggers being the upswing in global coronavirus cases, the inflation scare and US taper talk and geopolitical risks. But looking through the inevitable short-term noise, the combination of improving global growth and earnings helped by more fiscal stimulus, vaccines allowing reopening once herd immunity is reached and still low interest rates augurs well for shares over the next 12 months. 

Expect the rising trend in bond yields to resume as it becomes clear the global recovery is continuing resulting in capital losses and poor returns from bonds over the next 12 months.

Unlisted commercial property may still see some weakness in retail and office returns but industrial is likely to be strong. Unlisted infrastructure is expected to see solid returns. 

Australian home prices look likely to rise 15 to 20% this year before slowing to around 5% next year, being boosted by ultralow mortgage rates, economic recovery and FOMO, but expect a progressive slowing in the pace of gains as poor affordability impacts, government home buyer incentives are cut back, fixed mortgage rates rise, macro prudential tightening kicks in and immigration remains down relative to normal. The lockdowns have increased short term uncertainty though.

Cash and bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.1%. We remain of the view that the RBA won’t start raising rates until 2023.

Although the $A could pull back further in response to the latest coronavirus scare and the threat it poses to global and Australian growth, a rising trend is likely to remain over the next 12 months helped by strong commodity prices and a cyclical decline in the US dollar, probably taking the $A up to around $US0.85 over the next 12 months.

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