Equities have great year but don’t forget the bad year

Financial headlines are proclaiming the best year of Australian share market returns since the 1980s, however, much of it is a bounce back from the COVID-19 lows

3 July 2021 | Shane Oliver, AMP Capital (Image: Marcus Reubenstein)

While the US share market rose 1.7% to a new record high over the last week helped by a goldilocks jobs report, other global share markets fell with concerns about a renewed rise in coronavirus cases.

Eurozone shares fell -0.5%, Japanese shares lost -1% and Chinese shares fell -3%. The latest coronavirus outbreak and new lockdowns also weighed on the Australian share market which was flat over the week with gains in telcos, retail and resources stocks offset by weakness in utilities, IT and property shares.

While some headlines have noted that Australian share prices saw their best financial year gain in 2020-21 since the euphoria of 1987, the comparison is a bit misleading in that while the share market (as measured by the All Ords) returned 30.2% in 2020-21 this followed a loss of -7.2% in 2019-20 whereas 1986-87 saw a 54% return after a 42.5% return in 1985-86. 

Coronavirus concerns

While there has been much understandable angst (and waffle!) here in Australia about the latest coronavirus outbreak and associated lockdowns, there is also bad news globally on the coronavirus front with the downtrend in new daily cases starting to stall and head higher again.

Australia’s daily vaccination rate remains low at 0.4% of the population. However, with global vaccine production ramping up and more Pfizer and then Moderna vaccines scheduled to arrive in Australia, it should accelerate in the months ahead. Of course, Australia is still a relatively lowly vaccinated country, and this has left it more vulnerable to the latest outbreaks starting in Sydney and then Brisbane which spread to other states necessitating more lockdowns – with lockdowns in the past week in Sydney and surrounds, Brisbane and big parts of Queensland, Perth and Peel and Darwin. The Perth and Darwin lockdowns have since ended and that in Queensland has been cutback to just Brisbane. 

Economic impact is still there

The economic impact is already evident in our Australian Economic Activity Tracker which fell back again over the last week reflecting declines in restaurant and hotel bookings, mobility and retail foot traffic. This is after having just recovered from Victoria’s lockdown. Our rough estimate is that providing the latest lockdowns are relatively short they will cost the national economy around $2.5bn with the experience of past snap lockdowns since November pointing to a rapid bounce back in economic activity once they end as pent-up demand is unleashed.

Of course, if they turn out to be longer the economic impact will be deeper – possibly necessitating more government assistance. The good news is that the lockdowns started when the flow of new cases was relatively low (compared to say Victoria in July and August last year – see the chart above) providing confidence that they should be relatively short. And as noted some of the lockdowns have already ended or been wound back. But NSW (where the lockdown is costing around $1bn a week) is a high risk having started the lockdown a bit later than was ideal given the new Delta variant, which along with a still rising trend in new cases means that there is a high risk that it will take a bit longer than two weeks to get it under control.  

Our US Tracker is now just above its pre-coronavirus level, and our European Tracker is almost there following a strong reopening rebound since April. 

Meanwhile, the Australian Government’s latest plan to exit coronavirus restrictions makes sense, but is consistent with what we had already been assuming in terms of what would happen once herd immunity is reached through vaccination later this year or early next year.

So, it doesn’t change our view on the economic outlook for the year ahead. Meanwhile we still have a long way to go to get vaccination up and as we have seen with previous reopening plans over the last year or so they are very dependent on coronavirus and it has an ability to surprise. In the meantime, snap lockdowns will remain a reality (whether they are called “last resort” or not), although the reduction in international arrivals may reduce the risk of them.