Economic Outlook
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The mid-year market update highlights the ongoing impact of COVID-19 on global economies, with significant market volatility observed in early 2020, followed by a policy-driven recovery. While Australian assets may benefit from better virus control and fiscal stimulus, concerns over second wave outbreaks and global economic recovery persist. The document outlines expectations for low interest rates, potential for share market pullbacks in the short term, and various economic indicators to monitor moving forward.
Economic Outlook
- 1. Mid-year market update: COVID-19 still dominating June 2020 Shane Oliver Head of Investment Strategy and Chief Economist
- 2. While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided. | 2 Important note
- 3. | 3 A matter of perspective
- 4. | 4 A matter of perspective
- 5. | 5 A rough start to the year – returns for major asset classes Source: Bloomberg, AMP Capital Key events • Shares rally into February despite COVID-19 outbreak in China. • Late February/March - COVID-19 goes global, shares and other growth assets plunge, bonds rally. • Second half of March – shutdown but significant policy stimulus, shares rally from late March. • April – decline in new cases in developed countries. • May/June – economic indicators improve but increasing China tensions. • June - second wave fears. % returns Year to date to May 12 months to May Australian shares -12.7 -6.7 Global shares in Australian dollars -2.5 +12.0 Global shares in local currency -7.4 +7.2 Australian fixed interest +3.2 +4.9 Australian REITS -20.2 -16.8 Global REITS -24.1 -18.4 Direct non-residential property (estimate) -6.0 -4.0 Direct infrastructure (estimate) -8.0 0.0 Cash +0.3 +0.8 Balanced growth superannuation funds (estimate) -6.0 +1.0
- 6. | 6 Shares have had a volatile ride so far this year… ….but with balanced growth super funds around flat over 12 months Source: Bloomberg, Morningstar, AMP Capital 0 50 100 150 200 250 00 02 04 06 08 10 12 14 16 18 20 Australia - ASX 200 US - S&P 500 Index US - S&P 500 -20 -10 0 10 20 30 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 Balanced/growth superannuation fund returns % returns, after tax & wholesale inv mgt fees 10 yr moving avg nominal return, % pa 12 mth nominal return, % pa Final observation is an estimatefor May
- 7. | 7 Economic and investment outlook • Expect a very large hit to global GDP in the June quarter from coronavirus driven shutdowns and uncertainty, followed by some recovery by year end as shutdowns ease. • Inflation to fall then remain low. • Global monetary and fiscal stimulus is far larger than seen in the GFC. • Australian fiscal stimulus is around 8% of GDP. • Cash rate to be around 0.25% for at least three years. • Shares at risk of a pull back in the short term but should provide good returns on a 12-24 month view. • Australian assets to benefit from better virus control, better stimulus, exposure to China. • What to watch: risk of a “second wave”, timely economic indicators, unemployment/ bankruptcies, US/China tensions and the US election. Source: Worldometer, Bloomberg, AMP Capital
- 8. | 8 Coronavirus cases globally – ongoing rising trend in emerging countries and in several US states Source: ourworldindata.org, AMP Capital 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 9,000,000 10,000,000 Coronavirus confirmed cases worldwide Total cases worldwide (LHS) Daily Change (new cases) (RHS) 7-day Moving Average 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 Coronavirus confirmed cases worldwide Daily Change (new cases) Emerging countries Developed countries
- 9. | 9 Coronavirus curve flattening vs “second waves” – watch hospitalisations and deaths Source: ourworldindata.org, Worldometer, AMP CapitalSource: ourworldindata.org, Worldometer, AMP Capital 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 China: Coronavirus daily change (new cases) 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 Italy: Coronavirus daily change (new cases) 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 United States: Coronavirus daily change (new cases) 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 0 100 200 300 400 500 600 Australia: Coronavirus daily change (new cases)
- 10. | 10 • A declining trend in cases in north eastern and mid-west states is being offset by rapid rises in the south and west. • This partly reflects increased testing in the south and west (and increased positive testing rates in some states). • Hospitalisations and deaths have been trending down (despite the flat trend in overall new cases) – more younger people being affected, better management of new cases and treatments. • The hurdle for a renewed shutdown may now be greater - watch the medical system and deaths. “Second wave” risks in the US Source: The COVID Tracking Project, AMP Capital 0 5,000 10,000 15,000 20,000 25,000 Coronavirus Daily New Cases: US Regions Northeast South Midwest West 0 200 400 600 800 1,000 1,200 1,400 Coronavirus Daily New Deaths: US Regions Northeastern states Non-Northeastern states (Midwest, West, South) *7-day Average
- 11. Australia has done well in getting coronavirus under control (although Victoria’s experience shows we should not be complacent) Source: ourworldindata.org, Worldometer, AMP Capital | 11
- 12. | 12 Lockdowns have eased in developed countries Source: Oxford University, AMP Capital 0% 20% 40% 60% 80% 100% OECD Countries: Lockdown Stringency Index % of OECD Governments Moderate Severe Intermediate
- 13. | 13 Global business conditions have been hard hit by coronavirus, but look to be improving Source: Bloomberg, AMP Capital 20 30 40 50 60 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Services Manufacturing Global Manufacturing & Services PMIs Stronger conditions Weaker conditions -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 30 35 40 45 50 55 60 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Global Composite PMI (LHS) World GDP growth, annual % change Global Composite PMI vs World GDP
- 14. The Chinese economy has recovered to around normal Source: Goldman Sachs | 14 35 37 39 41 43 45 47 49 51 53 55 35 37 39 41 43 45 47 49 51 53 55 11 12 13 14 15 16 17 18 19 20 NBS Caixin Index Index China Manufacturing PMIs:
- 15. | 15 The US may have bottomed Source: Bloomberg, AMP Capital -60 -50 -40 -30 -20 -10 0 10 20 US Economic Activity Tracker* Annual % change * Components of the tracker include; Restaurant performance, Air Travel, Consumer Confidence, Initial Jobless Claims, Hours worked, Local businesses open, Rail Freight Loads, Retail Sales, Retail Foot Traffic, Apple & Google Mobility Indices and Hotel bookings.
- 16. | 16 The global economy – on track with our base case but will take a while to return to 2019 activity Source: AMP Capital
- 17. | 17 Coronavirus and the global economy – signposts have become more positive Source: Bloomberg, AMP Capital 0 20 40 60 80 100 120 0 20 40 60 80 100 120 99 01 03 05 07 09 11 13 15 17 19 21 QE will boost central bank balance sheets % of GDP Bank of Japan Federal Reserve European Central Bank Australia
- 18. | 18 Aust economy likely contracted sharply this quarter…but April likely to be the low point Source: ABS, AMP Capital Base case Worse case Unemployment, high 8% 15% plus Wages growth 1% -2% Underlying inflation 1% 0% House prices -5 to -10% -10% to -20% $A (low) ~$US0.55 ~$US0.50 -60 -50 -40 -30 -20 -10 0 10 20 Australia Economic Activity Tracker* Annual % change * Components of the tracker include; Credit card data, Energy usage, SEEK job ads, Traffic index, Retail foot traffic, Restaurant performance, Consumer confidence, Apple & Google Mobility Indices and Hotel bookings.
- 19. • Better virus control. • Better stimulus. • Exposure to China. Note that Australia has an education trade surplus but a tourism trade deficit. | 19 Australia may come through this period better than most countries, which could benefit Australian assets and the Australian dollar Source: AMP Capital -2 -1 0 1 2 3 Mar-99 Mar-02 Mar-05 Mar-08 Mar-11 Mar-14 Mar-17 Mar-20 Education and tourism trade balances in Australia (Exports - Imports, % of GDP) % GDP Education Tourism 0 5 10 15 20 25 30 35 40 Global stimulus in response to Covid-19 Loans & guarantees Direct fiscal support (spending & revenue) % of GDP
- 20. • Three steps • Each step conditional on medical criteria • Phased opening of shops, cafes etc • Gradual return to work • Gradual return to domestic travel • Distancing and hygiene maintained • International travel last to return – except NZ, students?, First Mover countries? Note that the bulk of the hit to economic activity (-10% of GDP) has come from the shutdown impacting domestic activity, global travel/ immigration is just cream on the top | 20 Source: Australian Government, AMP Capital A phased re-opening
- 21. | 21 -30 -25 -20 -15 -10 -5 0 5 1900 1920 1940 1960 1980 2000 2020 Australian Federal budget deficit Budget balance, % GDP, financial years Surplus Deficit Forecast WW1 WW2 0 20 40 60 80 100 120 140 160 180 Australia US Eurozone Japan Net public debt, 2019 & 2021 % of GDP 2019 2021 What about the budget deficit and debt blow out? Source: Australian Treasury, RBA, IMF, AMP Capital
- 22. | 22 The COVID-19 crisis will have some lasting implications • Lower for even longer interest rates. • Further blow to globalisation. • Boost to US-China cold war ahead of US election. • High inequality, social dislocation and tensions. • Bigger government/bigger public debt. • Risk of higher inflation long term with money printing. • Investor and consumer caution reinforced. • Faster embrace of technology - further boost to on-line retail and working from home. • Bad for airlines (as was terrorism). • Another test for the Eurozone? • Lower immigration. Source: AMP Capital
- 23. | 23 The return of US/China tensions
- 24. | 24 The US election – Bush Jr and Obama started to see a bounce from about now Source: Real Clear Politics
- 25. | 25 A history of bear markets in Australia Recessions are typically associated with deep and long bear markets, but this is a different economic hit. Based on All Ords. A bear mkt is defined as a 20% or greater fall not fully reversed within 20 months. Source: Bloomberg, AMP Capital
- 26. Source: Bloomberg, AMP Capital | 26 -2 -1 0 1 2 3 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Australia Expensive Cheap -2 -1 0 1 2 3 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 USA Expensive Cheap -2 -1 0 1 2 3 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Europe Expensive Cheap -2 -1 0 1 2 3 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Japan Expensive Cheap Share market valuation indicators Shares cheap as bond yields have fallen too
- 27. Uncertainty is high, but low interest rates provide support for shares even with a sharp fall in dividends Source: Bloomberg. RBA, AMP Capital | 27 0 1 2 3 4 5 6 7 8 9 10 00 02 04 06 08 10 12 14 16 18 20 Percent Bank 1 year term deposit rate Grossed up dividend yield - Aust shares Aust shares offer a far more attractive yield than bank deposits
- 28. US shares reached an overbought extreme – short-term negative, longer-term positive? Source: Strategas, Bloomberg, AMP Capital | 28
- 29. The Australian dollar has likely already seen its low – expect a rising trend as economic activity recovers Source: RBA, ABS, Bloomberg, AMP Capital | 29 0.0 0.5 1.0 1.5 2.0 2.5 3.0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 $US per $A, at June each year Purchasing power parity implied level (based on relative consumer prices) The $A is "around" fair value based on relative prices $A/$US Latest -4 -2 0 2 4 6 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 95 97 99 01 03 05 07 09 11 13 15 17 19 $A/$US (LHS) The interest rate gap between Australia and the US versus the $A Gap between RBA cash rate and Fed Funds rate, % (RHS)
- 30. The Australian property market has slowed – expect prices to fall around 5-10% Positives – low rates, low listings Negatives – hit to household incomes/employment, hit to immigration, fall in rents Source: Core Logic, Domain, AMP Capital | 30 20 30 40 50 60 70 80 90 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Sydney Melbourne Auction clearance rates Monthly avg, % First rate cut First rate cut Note: chart shows month to date average for the latest month using estimated final for latest week -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Monthly % change Sydney Capital city average Melbourne Capital city home prices rolling over..again
- 31. | 31 View on major asset classes • Cash – offers very poor returns around 0.25%. • Bonds – expect very low returns given very low starting point yields. • Shares – vulnerable to a short-term retest of lows, should have solid 12-24 month returns. • Unlisted commercial property and infrastructure – hit to economic activity will weigh on near-term returns but expect medium-term benefit from lower for longer interest rates. • Australian dollar – downside risk with shares in near term, likely to be higher in 12 months. Source: AMP Capital
- 32. | 32 Nine rules for investors to keep in mind in times like the present • Make the most of the power of compound interest. • Don’t get thrown off by the cycle. • Invest for the long term. • Diversify. • Turn down the noise. • Buy low and sell high – selling after a big fall just locks in a loss. • Beware the crowd at extremes – shares bottom at the point of maximum bearishness. • Focus on investments you understand and that provide decent, sustainable cash flows. • Seek advice. Source: AMP Capital
- 33. Source: Bloomberg, AMP Capital | 33 $1 $10 $100 $1,000 $10,000 $100,000 $1,000,000 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 Value of $1 invested in Jan 1900, pre fees & taxes Australian shares Aust bonds $997 (5.9% pa) $556,299 (11.6%pa) Aust cash $242 (4.7%pa) Shares versus bonds & cash over very long term - Australia Make the most of the power of compound interest
- 34. Source: Bloomberg, AMP Capital | 34 Don’t get blown off by the cycle and share market swings -30 -20 -10 0 10 20 30 40 50 60 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 All Ords Accumulation index, % pa return Rolling 12 month returns Australian share returns over over rolling 12 mth & 20 yr periods Rolling 20 year returns Australian share returns over rolling 12-months and 20-year periods
- 35. | 35 Economic and investment outlook • Expect a very large hit to global GDP in the June quarter from coronavirus driven shutdowns and uncertainty, followed by some recovery by year end as shutdowns ease. • Inflation to fall then remain low. • Global monetary and fiscal stimulus is far larger than seen in the GFC. • Australian fiscal stimulus is around 8% of GDP. • Cash rate to be around 0.25% for at least three years. • Shares at risk of a pull back in the short term but should provide good returns on a 12-24 month view. • Australian assets to benefit from better virus control, better stimulus, exposure to China. • What to watch: risk of a “second wave”, timely economic indicators, unemployment/ bankruptcies, US/China tensions and the US election. Source: Worldometer, Bloomberg, AMP Capital
- 36. | 36 Taking your questions