The attached note takes a look at where we are in relation to the coronavirus crisis and its impact on the economy and share markets.
The key points are as follows:
- After a strong rally from their March lows, in the short-term shares are vulnerable to bleak economic and earnings news as has been evident in the last few days.
- However, positive news on the coronavirus outbreak is starting to get the upper hand – with evidence of curve flattening, an easing in lockdowns and massive policy stimulus pointing to a possible return to growth in the second half, which should ultimately underpin a rising trend in share markets beyond short-term uncertainties.
The blanket coverage of coronavirus and its impact on the economy can lead to a lot of confusion right now. Some reports are hopeful of anti-viral drugs, others say a vaccine is at least a year away. There is talk of curve flattening but still rising cases and deaths. There is news of an easing in lockdowns but also worries about “second waves”. All this against a backdrop of collapsing economic data and surging unemployment. Some prognosticators say now is a great buying opportunity for investors whereas others see more financial pain ahead. This is a horrible time for humanity and particularly those directly affected by coronavirus, but I must say if ever there was a time to turn down the noise and listen to The Carpenters or Taylor Swift, this is it. Here is a summary of where we are currently at. First the bad news and then the good. I will keep it simple.
The bad news
- The reported number of coronavirus cases globally is still rising and has now gone through 2.5 million.
- The reported death rate is still rising and is now up to 6.9%.
- Many worry about a “second wave” of cases. This occurred in the 1918 Spanish flu outbreak, and Singapore and Japan which had been cited as models for containment are now cited as examples of this (although they really still seem to be in part of a first wave as their quarantining efforts failed).
- Most medical experts still say a vaccine may be a year or more away. I remember around 1984-85 constantly hearing a vaccine for HIV was a year away – but we are still waiting.
- In the absence of a vaccine some worry about coronavirus outbreaks every winter as it migrates around the world.
- Economic activity data is literally falling off a cliff. This was highlighted last week by the IMF’s forecast for a contraction in the global economy of 3% this year and in advanced economies of around 6%. And this masks a likely 10 to 15% slump in GDP centred on the June quarter. Falls of that magnitude have not been seen since the Great Depression. The collapse in economic activity in the US and Australia is highlighted by weekly economic activity trackers we have constructed based on data for things like restaurant bookings, energy usage, confidence, foot traffic and jobs.
Source: Bloomberg, AMP Capital
- We are constantly hearing forecasts of unemployment going to 10%, 15% and maybe even 30% in the US (which does not have the benefit of Australian JobKeeper wage subsidies – if you are having a salary paid by JobKeeper then you will not be unemployed).
- This in turn is creating much consternation around whether there will be an economy left once the shutdowns end and/or how governments will get their debt down.
- Finally, the blame game is on. While partly politically motivated, US China tensions seem on the rise again.
The good news
- While the total number of coronavirus cases is rising, new cases appear to be levelling off or in decline
Source: Worldometer, AMP Capital