Economic Review

15 Apr

Economic Review

Global Equity Markets 
Global shares recorded dramatic falls in March as the rapid spread of coronavirus infections generated alarm about global health systems and the global economy. On 11 March, the World Health Organisation increased their global risk assessment from very high to a pandemic.

Wall Street slumped with the benchmark S&P 500 falling by 24% in 16 trading days before regaining some ground to finish the month down by 12.4%. Shutdowns across the entertainment, retail and travel industries and the recommendation that employees work from home had a profound negative impact on economic activity in California and New York. These shutdowns extended across the US as the coronavirus threat escalated. The Federal Reserve (FED) responded to the crisis with two interest rate cuts totalling 1.5% during March. The FED also announced asset purchases of US Government bonds and mortgage backed securities as well as funding support for commercial paper and municipal bonds. It also reduced capital reserve requirements for banks. This was accompanied by a record US$2trn fiscal stimulus package involving business loan guarantees, consumer cash payments and increased hospital and local government spending which provided the impetus for the mild relief rally for US shares.

European shares also fell with coronavirus concerns. Italy, Spain and France have been severely impacted with a surge in infections and fatalities that is placing immense strain on their hospital systems. Factory shutdowns have been notable, with French and German car manufacturers announcing production closures across Europe. European business surveys have plunged to levels below the Global Financial Crisis in 2008, indicating that recession conditions prevail across the EU. In response, the European Central Bank announced increased purchases of government bonds and commercial paper.

UK shares also fell sharply. The PMI business survey fell to a 20-year low, suggesting a looming recession. News that the British Prime Minister Boris Johnson had contracted the virus only added further concerns to UK financial markets.

Asian share markets also reflected virus concerns. But the key surprise has been the resilience of China’s share market. This can be viewed as a positive response to China’s central bank cutting interest rates and providing guidance to the major banks to lend to small and medium enterprises. However there have been anecdotal reports of significant buying by government agencies to support China’s share markets. Japan’s share markets also recorded milder declines given the increased commitment of the central bank to buy corporate bonds, exchange traded funds (ETFs) and real estate investment trusts.

Table 1: Global share market performance – March 2020
US S&P 500 -12.4%
US Dow Jones -12.0%
Euro Stoxx 50 -16.3%
German DAX -16.4%
UK FTSE 100 -13.4%
Japan Nikkei 225 -9.7%
China Shanghai Composite -4.5%
Source: Factset, IRESS, April 2020

Australian share market review
Australian shares also recorded dramatic falls given the global gloom. Given the sharp declines in oil prices (Brent down by 48% for March), the energy sector led the market down. Australian real estate investment trusts (AREITS) also slumped, declining by 35 % as the closure of many retailers cast doubt over future rental income. Financial sector shares were also hard hit with concerns that the potential, sudden stop in Australian economic activity will see rising bad debts. The metal and mining sectors recorded milder falls as the benefit of a weaker Australian Dollar and the resilient performance of some key commodity prices (iron ore, gold) was partly beneficial.

In response to both the pandemic threat as well as a subdued Australian economy, the Reserve Bank (RBA) cut the cash interest rate twice in March to a historic low of 0.25 %. The RBA has also decided to rapidly expand their balance sheet by the purchases of Australian federal and state government bonds as well as providing an extra A$90b in funding to banks to encourage lending. The Federal Government also announced a trio of fiscal support packages totalling A$213 b (circa 10% of Nominal GDP). These measures include wage subsidies to encourage business to retain staff, extra payments to existing welfare recipients as well as direct financial grants and loan guarantees for small business.

The Australian Dollar (AUD) continued to weaken against all major currencies, falling by 5.7% against the US Dollar (USD) to finish the month of March at USD0.6143.

Table 2: Australian share market performance – March 2020
S&P/ASX 200 Accumulation Index -20.7%
S&P/ASX 200 Industrials Total Return Index -21.4%
S&P/ASX 200 Resources Total Return Index  -17.4%
S&P/ASX Small Ordinaries Total Return Index -22.4%
S&P/ASX 200 A-REIT Total Return Index -35.1%
Source: Factset, IRESS, April 2020

Large Caps (S&P/ASX100)
After declining by nearly 40% in February, Wisetech Global regained some ground during March finishing the month up by 13.4%. NIB Holdings (+13.3%) and A2 Milk (+7.7%) were the next best performing large cap stocks during March. The worst performing Australian large cap stocks during the month were Flight Centre (-69.6%), Virgin Money UK (-58.7%) and Oil Search (-56.1%)..

Listed property
The S&P/ASX 200 AREIT Total Return Index declined by 35.1% in March 2020, underperforming the S&P/ASX 200 Total Return Index by 14.4%. All sectors declined with Industrial AREITs faring best during March, recording a decline of 19.2%, followed by Office (-25.7%). Diversified AREITs fell by 38.1% with Retail sector AREITs plummeting by 46.3%.

Written 3 April 2020.

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