Coronavirus cases continue to grow around the world with 826,000 confirmed cases and 40,700 reported deaths as of 1 April 2020. Italy and New York City are amongst the worst-affected areas. Australian cases have also risen to 4,707 and 20 deaths, driven by Australians returning from overseas travel.
This has seen governments react with major lockdowns on state borders and the inevitable shutdown of many businesses. These moves have negative implications for the economy and mixed ones for your investments.
Governments and central banks, such as the Reserve Bank, are acting to stimulate the economy and help people who have lost their jobs.
Australian Government efforts to reduce virus cases include:
States closing their borders to non-essential travel, and imposing state-run 14 day mandatory quarantine for all overseas arrivals, and in some states for all arrivals.
Limiting large gatherings both inside and outside – now limited to 2 persons.
State governments are also imposing a shutdown of non-essential businesses such as restaurants and gyms.
Starting school holidays early.
Our health response appears to be doing reasonably well with the number of new cases slowing in recent days, and 20 reported deaths in Australia. For context, other countries with similar numbers of infected cases had substantially more deaths and intensive care cases.
The Australian Government has released a number of resources to keep people informed on the virus and the measures taken to reduce its spread. There is an app for smart-phones called “Coronavirus Australia” and the department of health provides regular updates on their website:
The federal government released a third round of stimulus measures, with the main component aptly named “Job Keeper”. This is a $1,500 per employee, per fortnight payment to businesses who keep workers on the payroll. This measure has a wider reach than previous measures in that it includes sole traders and will flow directly to workers and is backdated to 1 March. To qualify, the business needs to experience a reduction in revenue of 30% or more (50% or more for companies with over $1b revenue).
In the US, over $2.2 trillion USD has passed to support bailouts and increased unemployment benefits. In the UK a £60bn stimulus plan is also underway. This will help the global economy eventually recover from the actions taken to stop the spread of the virus.
Will the stimulus work?
The government measures will help support people that lost their jobs because of the impact of this outbreak, and keep businesses going so that they are in a strong position to resume when the crisis is over.
However, there is also a higher chance of an Australian recession for the first time since the early 1990s because of the job losses and business shutdowns that are happening. Similarly, there is likely to be a global recession.
The Government stimulus and RBA policies will help stabilise the economy in the medium term.
Be prepared for:
Low returns on cash e.g. term deposits and bonds for the next three years at least (RBA is targeting lower yields in Australia).
Potential weakness in property markets from rising unemployment (people defaulting on loans). Rents to come under pressure potentially from rising unemployment rates reducing the income of any direct property you hold in the short-term.
Dividends will come under pressure in the short term. Many listed companies will struggle to keep their performance going. Be prepared for cuts to dividend income and/or franking.
Good news stories:
Your investments won’t just include shares. You may have exposure to alternatives or government bonds that have helped protect your assets during this time with some of these experiencing positive performance during this period.
Equities and listed property to experience some share price weakness over the next 12 months but stronger long-term returns.
Age Pension to be more accessible through lower deeming rates legislated by government. This will help offset weaker income from cash and term deposits.
Implications for investors - Looking forward
Our strategy at this time remains to continue holding our current target asset allocations, with a view to increase growth assets when the virus spread begins to abate. As this is a constantly evolving situation, we continue to monitor and review our strategy daily.
Fighting the impact of the virus needs to occur on two fronts – health and economic. In previous emails, we highlighted the need for massive government stimulus to counter the economic impact, and we have since seen unprecedented stimulus packages around the world. We are now looking for some progress in fighting the virus. To date most success has come from quarantine and social distancing measures which helps on the health front, however it is very damaging to the economic front. Government stimulus will help cushion the economic damage caused, however long term we will need to see a vaccine or effective treatment of the virus before any expectation of sustained economic recovery can occur. In China where they have had success in eliminating new cases, shops are re-opening however social distancing measures remain in place, so the economic recovery is muted.
In recent days we have seen equity markets recover some of the losses which is encouraging. In the US last week there was a 20% rally in share prices which by conventional standers ended the ‘bear market’ tag and put the US in a ‘bull market’ in the shortest time frame in history. We don’t think this is a sign that market volatility is over however and expect the wild swings to continue in the coming weeks.
We are often asked by clients if now is a good time to be buying shares. As highlighted in a previous update, from a valuation point of view shares are looking the cheapest they have in years. This opens opportunity for buying good companies at cheap prices however we expect the market volatility to continue in the short term and prefer to take a cautious approach to buying any shares now.
We are here to help
The effect of this virus is varied from person to person but it is likely most people will be affected to some extent. There are many things you can do to manage the economic impact, and to protect yourself from the health risk of the virus.
At frontier we are here for you and are doing all we can to help in the areas we know will impact our clients. However, if there is anything further that you would like to discuss or need help with, please feel free to contact your adviser. We are here to help and all our staff are working to support you in this unprecedented time.
General Advice Disclaimer: The information in this report is general advice only and does not take into account the financial circumstances, needs and objectives of any particular investor. Before acting on the general advice contained in this report, an investor should assess their own circumstances or seek advice from a financial adviser. Where applicable, the investor should obtain and consider a copy of the prospectus or other disclosure material relevant to the financial product before making any investment decision to acquire a financial product. It is important to note that the price or value of financial products go up and down and past performance is not an indicator of future performance.