Market Update: April 2020

Equities showed remarkable recovery in April, with Australian shares, in particular, bouncing back nearly 9%! All sectors ended up positive, with Energy (+25%) and Information Technology (+22%) being the strongest performers. We summarise the main indices as at the end of April below:

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The recovery can mostly be attributed to growing optimism surrounding re-opening the economy and investor sentiment that indicates that we have already endured the worst. Despite this recovery, the magnitude and duration of the disruption remains unclear and, with over half of companies listed on the ASX 200 having withdrawn or downgraded earnings guidance, the outlook remains bleak and we remain cautious. Given the lagged nature of most data, we will likely be seeing bad news for a while yet, and given the strong run shares have had over the past month there is still short-term risk of another pull back.

As for the virus itself, there really hasn’t been any developments worth noting, as new cases have been trending sideways for over a month now:

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A majority of the new case growth has been in emerging countries such as Brazil and India, which is a concern. Fortunately for Australians, we are continuing to see a low number of new cases, albeit some problems with clusters, which has allowed us to reopen under a three staged process. Comparing OECD countries in terms of how they are performing in controlling the coronavirus outbreak (based around recovery rates, cases and testing) Australia ranks first, with New Zealand second (guess where your next overseas holiday might be!) compared to the UK at 31st and the US the worst performer in the OECD at 37th.

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Despite the success of our Covid-19 response, we are now in our first recession in 30 years, ending a remarkable world-record breaking run where the annual growth of our real GDP never dipped below 1.1%. Yet while expectations have adjusted to this new short-term reality, there appears to be a broad consensus that this Australian recession will be a short-lived “V” rather than an extended “U”. So in the short term, while dividends from banks, property and infrastructure shares have dropped, these are necessary cash conservation measures to counter demand shocks and provide a stronger platform from which to bounce back. We remain sceptical of this view, as the true economic impact is being masked by Jobseeker/Jobkeeper payments and it is hard to get a good read on how business will perform once these are scaled back.

April saw oil prices fall off a cliff, moving from just over $20 to NEGATIVE $40 a barrel! Unbelievable!

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Unlike many futures contracts which trade under “paper” markets, when it comes to oil you actually have to take delivery… and then find somewhere to store your thousands of barrels. For these particular contracts, the storage facilities in Oklahoma was near capacity and this saw contract holders pay people to take the contracts off their hands during the final days of trading.

The current oversupply of oil should begin to reverse slowly as demand destruction levels off and OPEC 2.0 producers begin cutting production. It may be too early yet to consider going hard into oil companies as survival is still the main priority.

What is positive news is the growing pressure for economies to open back up, and hopefully we can see good leadership and the balance between health and economic issues managed. With a surprisingly stable share market over the past few weeks, we continue to recommend caution and patience.

30 June is also fast approaching, so now is the time to start considering whether to top up super contributions, realise any capital losses to offset previous gains and plan pension drawdowns going into the next year. Please contact your financial adviser if you wish to discuss any strategies specific to your position.

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