Investment Update - September 2020

COVID-19 remained the big story of the last quarter. Tragically, by the end of September the pandemic had caused over one million deaths. That was up by 500,000 since the end of the previous quarter, and many countries were experiencing devastating ‘second waves’. While most of Australia managed to keep case numbers of coronavirus at very low levels, Victoria provided a case study in the severe human and economic impacts of having the virus escape control.

Unemployment ups and downs

The official unemployment rate from the Australian Bureau of Statistics was 7.5% in July, but showed a welcome drop to 6.8% in August. Meanwhile, NSW claimed that 70% of jobs initially lost in the pandemic had been restored. However, the real unemployment rate is much higher when JobKeeper, employees working zero hours, and a big jump in casual & temporary workers are taken into account. Roy Morgan estimated that the actual unemployment rate is closer to 13.8% and the combined unemployment and under-employment rate is 22.8%. Still, both these figures were down from their peak in late March.

Property problems

The major property markets of Sydney and Melbourne declined for the fourth month in a row, with the ABS reporting that in the June quarter these major city housing markets dropped by 2.6 and 2.8% respectively. The outlook for housing construction is also weak. Australia relies on immigration to generate the population growth that stimulates construction and supports the prices of existing dwellings. With our borders effectively closed that population growth will either be delayed or will fail to materialise. Rental income is also expected to decline, particularly in markets with a high proportion of overseas students who are unable to return to Australia. 

Financial markets

After a bit of a rally through July and August the local share market ran out of steam, with the S&P 200 index finishing the quarter down by 1.4%. International markets continued to produce volatile movements. Despite weakening a little towards the end of the quarter the MSCI All-Country World Equity Index rose 7.2%. Much of this was attributable to the US market with the S&P500 up 7.6% and the NASDAQ up 10.2%.
The Aussie dollar also weakened slightly towards the end of the quarter, finishing flat against the Euro and British Pound, up 2% against the Yen, and up 3.8% (from the high 60s to low 70s) against the US Dollar.

Outlook and implications for investors

Volatility looks set to continue, thanks to a variety of opposing factors. On the positive, Governments and Central Banks are continuing to provide massive stimulus to economies, through low interest rates and government spending. In Australia, the RBA has flagged the possibility of a further cut, but kept rates steady at it’s meeting on 6 October.
A key factor of course is the duration and severity of COVID-19, and hopes for the development and distribution of a vaccine, and the consequences for eventual resumption of travel, trade and growth. Additionally, the US presidential election could see an increase in market volatility, with the final outcome anything but certain.

Economic indicators – 2 October 2020                   1 year % excluding dividends