Markets and Outlook

We have not included an economic update since the world has changed in the last week. In fact deeper recessions may perversely be a good indicator as it would imply that containment is being taken seriously. This is a health crisis that has very quickly become an economic one as well. We do not know how deep this contraction will be, but it will be it will be accompanied by massive fiscal stimulus. The federal government has announced a package equivalent to around 10% of GDP and we expect more to come.

It is very difficult to know when the economy will turn the corner. We would not watch that too closely (leave it to the government) but rather look at the trajectory of new cases or some treatment. We would not expect a vaccine for 12 to 18 months but there is some chance of an anti viral therapy in a 3 to 6 month timeframe.

Equity markets have had a huge fall but so have earnings with total shutdowns in some industries and the population hunkering down. The chart below gives one example, restaurant bookings which have plunged.

We expect a lot of distress with many companies needing to raise capital to service debt amid declining cashflow. One thing we would avoid is higher yielding credit as that tends to be illiquid when markets are under stress. The problem is that we do not know what earnings will be in this environment. One thing that has cushioned the blow has been unhedged global equities with the falling Australian dollar adding about 15% to returns.

Eventually we will come out of this just as the world has recovered from previous pandemics. Generally the bounce is V – shaped but we suspect that this recovery will be a little more protracted given the economic damage. However, we expect rates will stay much lower and for longer than they would have without this shock. What this means is that growth assets will be the only way to get any reasonable yield. There will also be some second order effects with supply chains being moved out of China and manufacturing returning to western countries. Not being dependant on China is in the national interest of most countries but we suspect there will also be some payback given the damage China has inflicted on the global economy.