Investment Update – June 2020

During the last quarter one story has dominated the news and investment markets – COVID-19.

By the end of June at least 10 million people had contracted the disease, and over 500,000 had died. With 8,000 cases and 104 deaths, Australia was amongst the countries that have been most successful in limiting its spread. However, this success came with a major cost. By June, 800,000 fewer people were on the nation’s payrolls than at the start of the pandemic. The travel, hospitality and entertainment sectors were particularly hard-hit.

Key numbers
Perhaps surprisingly, investment markets took an optimistic view of the long-term financial consequences of COVID-19. While not returning to its record highs, the S&P ASX200 index rose 16% over the quarter, a little behind the MSCI All-Country World Equity Index (up 18.7%) and the US S&P500 (up 18%). However, the real action was on the tech-heavy NASDAQ, which lifted 30.6% over the three months to set a new high.

The RBA cash rate stayed at 0.25%, with no great expectations of a change anytime soon.

The Aussie dollar rose steadily, increasing from 61.7 to 69.1 US cents from the end of March till end of June. It enjoyed similar gains against the British Pound and Japanese Yen, and a slightly smaller gain against the Euro. While there are many factors that influence the value of the dollar, this last quarter saw it closely following the fortunes of one of our major export commodities – iron ore.

Overall most “balanced” investors finished the financial year with a slight negative return, but with a wild rollercoaster ride over those 12 months.

What next?
COVID-19 is likely to remain the dominant story for some time yet. Following the initial lockdown, countries around the world, Australia included, are conducting something of an experiment in trying to ease restrictions without triggering ‘second waves’ or other outbreaks. Events in Victoria have shown how challenging this can be, but successfully lifting lockdowns is a critical step towards restoring anything resembling normal economic activity.

Another challenge facing the federal government is how to continue to support the millions of people on the JobKeeper allowance (extended now until 28 March 2021) and the JobSeeker supplement (extended to 31 December 2020). There is concern that the sudden cessation of these programs will deliver another blow to the economy.

Outlook and Implications for Investors
The wild ride of 2019/20 reminds us of some of the key lessons for investors – maintain diversification, remember that timing the markets is very hard, and take a patient, long-term view.

Going forward there are a range of factors that may influence markets and drive further volatility. Key risks include extended lockdowns and second-wave surges in infections, economic knock-on effects of business failures and unemployment, and global political risks such as the US election cycle and international tensions. On the positive, numerous countries have demonstrated success in containing the spread of COVID-19, and there are signs of progress towards a vaccine. Policymakers appear committed to fiscal and monetary support for the economy, and a range of indicators suggest a significant rebound in demand and production will translate to recovery (albeit bumpy and gradual).

Economic indicators – 5 July 2020                   1 year % excluding dividends

Australia: ASX 200

-10.3

Japan: Nikkei 225

2.6

China: CSI 300

13.5

UK: FTSE 100

-18.5

US: S&P 500

4.7

Australia: Current at 5 July 2020

 

$AUS : $US

0.69

Official interest rates (%)

0.25

Australian 10-year bond yield (%)

0.91

 


Published : 27 Jul 2020