Merlea Macro Matters – April 2020


In the span of less than three months, the novel coronavirus has shuttered much of the global economy, bringing an 11-year economic expansion to an abrupt end. The coronavirus has challenged individuals, families, companies, governments and investment markets around the world. It is an experience that could fundamentally reshape consumer and corporate behaviour as well as financial markets. The quarantines and “social distancing” necessary to protect public health have triggered widespread shutdowns on the production side of the economy and a collapse of spending on the demand side. To make matters worse, economic uncertainty has spiked. At this point, it is difficult to project with any confidence how long these disruptions will persist. In response, central banks around the world have taken aggressive actions to provide liquidity to markets and support their economies.

Sizable fiscal stimulus is also being implemented in many countries. While these efforts will help blunt the virus’ blow, the outlook for growth ultimately depends on how quickly the virus can be contained – the longer the contagion persists, the more severe the economic downturn. A longer-lived pandemic will also translate into more sustained damage to the economy’s underlying structure, likely meaning a more muted recovery once the virus abates. There are several paths that markets can take from here.

The best-case scenario is that the Coronavirus fears are overblown, and the pathogen is quickly contained. Moreover, lower oil prices help support most businesses and consumers in a period of low growth. This is a V-shaped scenario, as economies and equity markets will rebound as sharply as they have fallen.

The worst case is that global economies enter a deep recession as workers take ill or are otherwise unable to attend their places of work, businesses grind to a halt and consumer activity is stymied. Lower oil prices don’t help much in the face of widespread demand and supply destruction, and we enter a bear market for risk assets.


In either case, there will likely be four distinct phases:

  • Phase 1 – economic and corporate shock. This phase will see global growth slow and corporate margins narrow as sales fall, costs rise and supply chains are disrupted.
  • Phase 2 – financial disruptions. This phase, which overlaps with phase 1, will be characterised by distressed selling and furious price discovery of assets.
  • Phase 3 – formation of a bottom. Stabilisation will happen first in financial markets and then the real economy.
  • Phase 4 – fears ebb as the “new” becomes the “new normal”. In this phase, the Coronavirus either runs its course or other solutions are found. Eventually, animal spirits will be reignited.


At present, we are clearly in phases 1 and 2 as markets continue to try and price the scale of the outbreak plus the other ever-present factors. Only in hindsight can you know for sure that we have entered phase 3 – it is not possible to know in real time. Our base case is for an eventual outcome between the two extremes described above resembling more a “U” than a “V”, but not falling into an outright worst-case recession. Why?

First, economic data would suggest that China – both where the virus originated and its epicentre – is returning to some degree of normalcy The economy appears to be healing too: 77.8% of the rail projects under construction, 68.2% of the road projects and 59.3% of the airport projects have restarted; coal consumption in the six largest power generators is more than 70% of the normal level compared to about 60% in mid-February. Traffic in Shanghai and Beijing is gradually increasing and well off the lows for both.

Second, regarding valuations, the investment landscape remains challenging, with little screaming value anywhere. Nonetheless, equities remain far more attractive than government bonds, and recent market gyrations will only have deepened that relative case (i.e. equites became cheaper and bonds more expensive). From current valuations, our quantitative models would suggest a mid-single digit annualised return from equities over the next five years compared with a slightly negative return from bonds. This would imply that a bias towards risk remains sensible for long-term investors.

Assuring the constraints on social life and business activity can be eased before the economy takes irreparable damage, the current market dislocations should offer long-term investment opportunities. Despite the attractive valuations and generous premia, we deem it best to wait before adding further to risk. In this regard, we will be looking for two important developments:


  • Firstly, evidence global COVID-19-infections have peaked (which would make an easing of lockdown measures visible) and that the risk of a second wave is contained and manageable.
  • Secondly, evidence that the economic freeze has by and large been successfully bridged, avoiding the creation of systemic risks to international financial systems, like those witnessed during the last crisis more than a decade ago.


Furthermore, given the increased severity of the lockdown and quarantine measures undertaken by governments around the world, it is highly likely that most, if not all, countries and regions will experience a significant recession in the first half of 2020. Therefore, we expect the economic data to deteriorate meaningfully over the next few months. At this stage it is difficult to determine how long this macro environment will persist. Historically, contraction regimes in our framework have lasted on average 6 months with wide dispersions, ranging between 2 and 15 months across all episodes since the 1970s. We will continue to follow the data and the framework as it runs its course, but it is nonetheless valuable to compare the current downturn to recent episodes of financial turmoil, despite meaningful differences in the source of the shock and market imbalances.



An unprecedented shock requires an unprecedented policy response. And that is what we have seen. Most encouraging has been the policy response from the likes of the UK and Germany where governments have committed to pay a significant proportion of workers’ wages during the shutdown to enable companies not to lay off staff despite the dramatic hit to sales. This is precisely the right kind of policy to deal with this type of shock, to give those economies the best chance of rebounding sharply once the health situation is under control.

Government-backed loans should also help many companies to avoid otherwise inevitable cashflow induced bankruptcies. However, loans may not be enough for the hardest hit companies some of which are likely to require grants or bailouts to survive a substantial loss of sales, at least part of which is likely to prove permanent.

Central bankers have thrown the kitchen sink at the problem, cutting rates to their lower bound and restarting and expanding asset purchase programmes. The Fed’s commitment to purchase as many government bonds as necessary is a substantial step, which should enable it to keep government borrowing costs low, despite the massive fiscal stimulus that is required to deal with the economic consequences of the virus. The Fed’s corporate credit programme should also prove a significant support for investment grade corporate bonds. With central bank and government support, highly rated large investment grade companies seem most likely to survive this shock whereas some junk-rated companies will likely not make it through this crisis. This suggests to us that a selective and up-in-quality approach continues to make sense within both credit and equities until there is greater clarity around the outlook.

Government bond yields are likely to remain low, despite significant government spending, supported by central bank purchases.


“Helicopter Money”Modern Monetary Theory

Government borrowing is set to rise significantly as a result of the Covid-19 pandemic, and this will put tremendous pressure on public finances. Government debt to income levels are already high in many economies as a result of the global financial crisis but now look set to rise significantly higher. In this environment, the idea of financing spending through printing money rather than issuing bonds becomes very appealing.

The key difference between quantitative easing and MMT is that the central bank prints money which is fed directly into the economy, either through tax cuts or increased spending, rather than by buying assets. Consequently, it would have a more immediate effect in boosting demand rather than waiting for higher asset prices to feed through to the economy. It also avoids the criticism of QE that it increases inequality by supporting wealthy asset holders.


What are the dangers?

On the downside, it is potentially more inflationary. This is in part due to its more direct effect on activity, but mainly because the government does not have any future liability in the form of bond issuance where the bonds must be repaid at some point in time. Therefore, it undermines fiscal responsibility. This is a policy more often associated with failing states than with developed economies and, unless done within prescribed limits and seen to be temporary, would result in a rating downgrade for the government’s debt and higher interest rate costs.

If accompanied by a loss of fiscal discipline, Modern monetary theory would make investors concerned about higher inflation. Bond yields would rise significantly as investors demanded more compensation for higher prices in the future. This in turn would have an adverse effect on risk assets such as equities which would de-rate (i.e. Price/earnings ratios would fall) as bond yields rose.


Listed Property

The REIT sector has suffered a much steeper selloff than the broader market. In some downturns, REITs may be a safer alternative given that nearly all properties owned by REITs will retain their functionality and that the land and improvements will retain some or most of their value. However, this downturn is unique in that a huge portion of the economy has come to a complete stop due to government shelter-in-place directives. As a result, businesses are disproportionately being evaluated by investors based on strengths of their balance sheets and their ability to withstand a prolonged significant decrease in revenues. As a result, sectors in which companies have higher debt/EBITDA ratios have been considered riskier.

In order to enhance liquidity and thus improve flexibility and increase the duration for which substantial revenue disruption can be withstood, many REITs drew down all or most of their credit facilities. This boost to cash on hand, paired with dividend cuts and suspensions, executive salary reductions, and layoffs has provided numerous REITs with far greater flexibility to endure an extended economic shutdown. This is a particularly challenging time to invest, because so much has changed over such a short period of time and much of the useful data has not yet been made public. Until REITs announce the amount of rent concessions made, changes to occupancy and whether they have been able to successfully remain within the limitations of their debt covenants, investors will be operating with a partial data set.

However, this also presents an opportunity. By analysing all publicly available information and taking a more granular look at each REIT as well as their respective tenants, more diligent investors will be able to make investment decisions with a more complete data set and thus improve their chance to identify significant mispricing of individual securities.

What’s driving these ASX 200 REITs higher in the current bear market? After all, it has been a rollercoaster year for Aussie retail in 2020. I think one positive has been the new mandatory code of conduct for commercial landlords and tenants. The deal was announced by Scott Morrison and provides some rules around evictions and rental agreements in the current environment. This looks to have put investors’ minds at ease for now. Many large retail tenants were headed towards a stand-off with the ASX 200 REITs as their landlords. This new code of conduct provides some structure and certainty, which is at a premium right now.

Whilst stock markets consolidate, opportunities will present themselves and we are bound to see some down days in the weeks ahead before we get out of the woods. Many will doubt the recovery, and this will be the catalyst for further selling, but we may not see the lows of March retested in this cycle. We are soon going to see the beginning of the rebuilding phase for the global economy, and focus and attention will soon turn to what earnings will look like in 2021.


Australian Equities

Unfortunately for Australian investors, the outlook for the local share market is not only determined by what happens to Australian corporate profits and to the Australian economy, it is also closely linked to the global economy.  We’ve had a big fall in the stock market, but now you’ve seen a big bounce from the lows. The volumes that we’ve seen have been quite substantial. The ASX this week announced that the average daily trading volume was up 96% year on year.

We don’t really understand the rally that we’re seeing, given the fundamentals that we’re also seeing in the market, but we do understand there are a lot of ETFs and index funds that need rebalancing day by day. We understand that moves in oil, iron ore and gold, for example, have had an immediate reaction on all those stocks that directly correlated to those commodities, and I think if you go back three, six months to the low rate environment we’re in and chase for yield, that argument does still play out. It’s probably got a bit better in some instances, rates aren’t 75 basis points anymore, they’re 25 basis points. Investors are searching more and more for income because they need that to live on. TD’s are still only probably 1.6, 1.7%, so we can see investors going into the market looking for yield. The trouble we’ve now seen the last couple of weeks is dividend cancellations/deferrals and these are probably going to be ongoing for a little bit longer.

Multiples are now at reasonable to cheap levels across the board, but the discrepancy within the market is wider than ever, even after the correction. Bear Markets do not treat every stock in the same fashion, compare NextDC (NXT) with Ardent Leisure (ALG) for example, but plenty of high-quality businesses see their share price fall, nevertheless. This is when shrewd investors receive an invitation to grab the Bear Market opportunity.

Earnings growth expectations are still wildly optimistic, and we expect an ongoing drag through not just FY2021 but also into FY2022. At face value, the local share market is now trading on a PE multiple below the 14.4x long term average, though that is changing rapidly as the market continues to add more gains with every day passing.

The ASX200 seems to be finding support in the vicinity of 4,800, which was the support level in the selloff in 2016 and the peak of prices in 2011. The Australian share market is fair value and we prefer Defensives such as consumer staples, healthcare, telcos and infrastructure and utilities


Global markets

For the first time since the Great Depression both advanced economies and emerging market and developing economies are in recession. For this year, growth in advanced economies is projected at -6.1 percent. Emerging market and developing economies with normal growth levels well above advanced economies are also projected to have negative growth rates of -1.0 percent in 2020, and -2.2 percent if you exclude China. Income per capital is projected to shrink for over 170 countries. Both advanced economies and emerging market and developing economies are expected to partially recover in 2021.

Around the world, governments are starting to think about how to reopen the economy once the virus is suppressed. It is not a matter of simply pulling a switch that turns on the lights. Rather, it is a matter of deciding on the sequencing of removing barriers to economic activity. Acting too soon risks reigniting the outbreak. Currently, much of the infrastructure for distributing goods lies idle. Once suppliers perceive increased demand, they can begin the process of reviving supply. That will mean retailers placing orders, container ships leaving ports, and ground transportation reviving. The risk is that, if companies are financially stressed, this process might be disrupted or delayed. That is why maintaining the fluidity of financial markets is so important. Recent initiatives by central banks and governments have been undertaken with the goal of providing businesses with enough funds and credit availability to revive business once demand picks up. The longer the crisis takes place, however, the more difficult this process will likely be.


While the market has been rallying on prospects of the economy reopening soon and the coronavirus (outbreak possibly) reaching some sort of peak but there are no guarantees here just yet and there is still significant uncertainty.  I don’t think we are out of the woods yet but having said that we are not perma-bears – we don’t see the virus as bringing on a depression or the biggest recession since the 1930s. The worst of the panic and fear is behind us now, we have seen the VIX declining another 8% to close at 38. Just as with the 2008 GFC, after the preliminary spike to 85, the VIX systematically declined from thereon after, so in our view, the markets are through the acute fear and panic stage.




We believe investors are being too optimistic and warn investors to be prepared for a new wave of declines in global markets after stocks rushed back towards a bull market from the ugly falls in March. While central banks and governments have taken the sting out of market disruption with their interventions, more problems may lie ahead. My concern is this relief rally might not be sustainable and I would not be chasing it today, especially those that missed the opportunity in March. The key question that must be asked is – have stocks gone from being massively oversold to now overbought in the near-term? Equity markets may need to fall 50 per cent before they have priced in this year’s likely earnings drop. The rebound since late March has coincided with signs that the virus may have peaked in some of the worst-hit parts of the world, raising hopes that the lockdowns that have hit economies from the US to India could soon be lifted. The reason I am not expecting the March lows to be taken out is that most fund managers have allocated the largest percentage of their portfolio toward cash since the 9/11 terrorist attacks – some twenty years ago, according to a new survey released on Tuesday by Bank of America.

A Bank of America’s global fund manager survey found that 5.9% of funds allocated toward cash, up from 5.1% in March. Cash balances surged in March, as fund managers sold and went to liquidity, and many will have been hurt in a relative performance sense by the big rally over the past several weeks. These Fund managers will be looking to buy the market on any future selloff.


High cash balances are a sign of pessimism, which as a contrarian is not only a positive bullish sign for stocks, but a buy signal. The ten-year average cash balance is 4.6%, so this has skewed out in March and is a bullish signal. For this reason, I would be buying into weakness in the weeks and months ahead and would not wait for the March lows to be tested – this is the level where almost everyone else is waiting to buy and deploy cash. Most investors and fund managers are underestimating the pivotal impact of the Federal Reserve. That when it comes to market developments, we believe that the Fed’s action where they committed $2.3 trillion in lifeline loans to small business represents a pivotal moment in this crisis.




The European economy has become broadly more resilient since the global financial crisis, placing it on a steadier footing to weather the economic fallout from the current crisis, if it proves short-lived. The financial sector is more stable, better capitalised, and less vulnerable to contagion, while economic growth has been steadier and expanding at moderate levels. The unemployment rate was at its lowest level since May 2008 prior to the pandemic and labour market conditions had improved. Household debt had also been steadily falling.

Unfortunately, Europe is the worst-affected region outside of China by COVID-19. It has high exposure to global trade, particularly China, the ECB has little monetary policy firepower and the rules around fiscal policy in the Eurozone make stimulus measures difficult to implement. Italy is in quarantine and strict containment measures have been put in place in France and Spain. These seem likely to be adopted by other European countries. The combination of these factors means that the Eurozone stock index has been the hardest hit of the major bourses, down more than 35% as of mid-March.

The Eurozone is likely to experience a deeper recession than the U.S. but should also experience a bigger economic bounce when the virus subsides. It will be one of the main beneficiaries of the rebound in global trade. Eurozone equities are now very attractively valued, and we would look for the European stock market to be one of the best performers in the recovery.

The FTSE 100 Index has been hit by a trifecta of challenges: Brexit uncertainty from the end-2020 deadline for an agreement, the large exposure to multinational firms with profits based overseas, and the high weighting to energy companies that have been hurt by the oil price collapse. The UK equity market has already been a poor performer, hit by three years of Brexit wrangling following the 2016 referendum. The COVID-19 declines take the FTSE 100 into exceptional value territory. It has a trailing PE ratio of under 10-times and a dividend yield pushing towards 7%.




If Tokyo can avoid a hard lockdown, Japanese economy could fare better than US or Europe.  Stimulus measures are underway. The Japanese government has initiated multiple fiscal stimulus packages amounting to 13 trillion and one trillion yen in December 2019 and March 2020 respectively. Also, the lower cabinet has recently just approved a record 102 trillion-yen 2020 budget.

The Bank of Japan has limited firepower, but has increased its purchases of government bonds, corporate bonds, and equities via exchange-traded funds (ETFs). The government is likely to announce emergency fiscal measures. Japan’s structural weaknesses in terms of weak monetary policy and persistent deflation mean it will likely remain an economic laggard relative to other developed economies. Putting together consensus estimates for earnings and dividend growth for end-2021 as well as the historical average PE, Japanese equities represent an attractive upside of 19.4 per cent, with returns mainly generated from valuation expansion.

All in all, while the macro view looks to be challenging in the short term, the longer-term outlook appears to be encouraging with signs of improvement and growth across various economic pillars. A potential delay in the Olympics could also turn out to be a blessing in disguise as the Japanese economy at that time reaps the benefit from the “Olympic Effect” as well as a low base effect.




The Chinese economy is gradually returning to normal with daily activity indicators for traffic congestion, subway use, coal demand at power stations and property sales continuing to trend up. Reflecting this, China’s PMI’s rebounded to around normal levels in March although this just appears to show that conditions improved compared to February rather than indicating that activity is back to normal. A pick-up in Korean exports in March provides confirmation of China’s pick up as stronger exports to China largely drove it.

Two risks for China remain 1) a second wave from say imported cases or asymptomatic people and 2) weak exports as the rest of the world slows. But the Chinese experience does indicate that there is light at the end of the tunnel if we are rigorous in implementing a shutdown and support businesses and people through it. Despite the rebound, we believe trade growth will get much worse in Q2. The rebound in March’s export growth was mainly due to catch-up following delayed production and shipments as a result of lockdowns and travel bans in February. Since the COVID-19 outbreak didn’t escalate in Europe and North America until late February, its impact on China’s exports to those major destinations might become more apparent in Q2, especially April and May. We expect China’s export growth to plummet to around -30% y-o-y in Q2. Import growth will also likely to remain weak on sluggish commodity prices and a slow domestic demand recovery. In addition, the threat of a decoupling of between nations amid the pandemic could further weigh on China’s trade prospects. The hope for a quick recovery is dimming, but a real stimulus package might be finally coming

We believe that the negative earnings revisions we have seen in the last 18 months are close to bottoming. We expect a more stable, mid-to-single digit increase in year-on-year growth in 2020.  With valuations for the overall MSCI China Index slightly below their long-term average, we may continue to see liquidity support from Southbound flows (to Hong Kong SAR from mainland China markets).



Commodity prices, other than gold, fell sharply over the quarter. As countries around the world halted activity to try to bring the spread of the virus under control, demand for most commodities declined, hitting prices. Oil was caught in a perfect storm with an agreement between OPEC and Russia to constrain supply breaking down just as the outlook for demand fell. This led the oil price to fall by more than 60%.



Gold played a key role during a historically poor first quarter as equities around the globe suffered massive losses amid COVID-19 panic. Going forward, the yellow metal must be considered in a well-diversified portfolio. Given the current monetary environment investors face, and the ongoing economic and financial market risks, there is little reason to believe the long-term upward trend in gold prices will change soon.

There are four key drivers that are likely to push gold prices higher in April: increased investor demand, monetary policy and fiscal stimulus, negative real yields, and a gloomy economic outlook.  Working in favour of gold are the monetary and fiscal stimuli, which do not have an upper limit with the balance sheet of the U.S. Federal Reserve already exceeding $5 trillion. The majority of global sovereign debt now trades at negative real yields, making gold a high yield (and zero credit risk) investment in comparison. While these drivers will continue to support gold at higher levels in April, some headwinds to watch out for are a higher U.S. dollar and low inflation.



Oil prices have become volatile thanks to unexpected swings in the factors affecting oil prices. The coronavirus pandemic has sent demand for oil plummeting. That has offset the three other factors affecting oil prices: rising U.S. oil production, the diminished clout of OPEC, and the strengthening dollar. On April 9, OPEC, led by Saudi Arabia, was joined by Russia and other major global producers in an agreement to take a record amount of crude oil production off the market. The 10 million-barrel-per-day reduction in output the participants agreed to is a massive change in course and will help establish some stability in a global oil market that’s in turmoil. And if there’s anything the oil market needs right now, it’s a big, stiff shot of stability.

However, even taking 10 million barrels per day — which works out to roughly the average daily production of Russia or Saudi Arabia before they increased output in April — simply won’t do enough. We are facing unprecedented levels of demand destruction under COVID-19 restrictions, and the oil patch is headed toward a shocking 2020 and potentially beyond.

Global demand predictions of a 20 million barrels per day decline could prove optimistic: more recent projections say demand could crater as much as 35 million barrels per day, with most of global transportation idled and energy consumption under mandatory business closures down sharply. That condition will prove temporary but won’t end when the calendar turns to May; it’s likely going to take at least until the end of 2020 — and very likely longer — before global energy consumption returns to more normal levels.


I do expect there will be money to be made by some investors as a result of the oil crash. Bargains will undoubtedly reveal themselves with the benefit of hindsight. But for now, I believe most investors should do absolutely nothing.

The demand destruction we are experiencing is completely unprecedented, and at the same time Russia, Saudi Arabia, and the United Arab Emirates are pumping more oil than they have in years. Even U.S. production is only just starting to slow and is still far above demand as the past couple of weeks of inventory accumulation shows.  Until demand starts to recover, investors are probably better off just keeping an eye on the sector.



Sector 12 Month Forecast Economic and political predictions 2020





Uncertainty from the coronavirus pandemic increases volatility in currency markets. Generally, safe-haven currencies like the USD, CHF and JPY will likely move higher. However, commodity currencies such as the AUD, NZD, CAD and ZAR exchange rates will likely fall. We see caution in chasing the currency higher, given that price action is likely to remain dictated by risk appetite, which remains tilted to the downside. Alongside this, we highlighted last year that with Australian interest rates heading towards the effective lower bound (0.25%), there is a material risk that the RBA is heading towards QE. Equity markets remain fragile leaving the Aussie particularly vulnerable to low yielders (JPY, EUR, CHF).








Gold has been on an incredible bull-run throughout April, with the precious metal surging to its highest level since October 2012. As central banks across the world embark on the largest money printing program ever in history – this could inevitability lay the groundwork for gold prices to revisit the all-time high of $1,900 reached in autumn 2011.


As we progress through the second quarter of 2020, the price action across the metals complex continues to resemble the trend last seen during the Global Finance Crisis. If history is anything to go by, then the stage is almost certainty set for gold prices to rise further and reach fresh 2020 highs in the months ahead.





In my view the sharp fall in share-prices of the big Australian miners is already pricing in a significant global slowdown and further falls in commodity prices, including iron ore.

Stand Aside.


We foresee major problems happening on the supply side, if demand for key industrial metals like copper, nickel and zinc, and critical metals such as lithium and rare earths, continue to take hits, alongside supply chain interruptions that delay or cancel shipments of raw materials. Indeed, we can already see pressure mounting on China’s metals supply chains. Being the first to come out of the pandemic, the issues we see developing there regarding metals supply, might be a template for what is to come for countries still in the throes of the coronavirus.








I think one positive has been the new mandatory code of conduct for commercial landlords and tenants. The deal was announced by Scott Morrison and provides some rules around evictions and rental agreements in the current environment.


This looks to have put investors’ minds at ease for now. Many large retail tenants were headed towards a stand-off with the ASX 200 REITs as their landlords.


This new code of conduct provides some structure and certainty, which is at a premium right now.




Over the past decade many Australian REITs have transformed themselves. Lessons learned from the 2008 financial crisis have led to improved capital management, with reduced gearing in what is an expanded fund management sector.


REITs of nearly every property type saw steep share price declines, mall REITs continue to trade at the widest discount to NAV. Casinos (-26.7%), Health Care (-18.4%), Other Retail (-29.9%) and Self-Storage (-5.5%) all traded at premiums to NAV at the beginning of March, but finished the month at a discount


Due to the rapid pace of share price declines among REITs, most analysts have not yet updated their NAV estimates to reflect the likely declines in NAV that most REITs have experienced during March. As a result, the NAV premiums listed may understate the magnitude of the premium, whereas the discounts may be meaningfully smaller than that which is the current analyst “consensus”. Over upcoming weeks and months these consensus figures will begin to more accurately reflect the actual NAV of each respective REIT as analysts update their estimates.



Australian Equities


The best way to position your share portfolio in the current bear market is to go overweight companies that provide basic amenities such as electricity, water, sewage services and natural gas. These are usually described as defensive because they’re heavily regulated and deal in long-term contracts that help them ride out volatility.      Start Buy.


If economists are right, then Australia will fall into its first recession since 1991 with the unemployment rate surging to around 7%-8%. One of the big questions is whether most of the bad news is already price in since the ASX 200 has shed more than 30% of its value since its February record high.


Economists believe that the drop is factoring in what is called a “normal” recession where earnings per share falls by an average 32% from peak to trough. But, if the recession sees unemployment rise by more than 3% (such as the 1975, 1982/83 & 1990/91 recessions) and is extended through 2020 (the pandemic scenario), then equities could continue to fall significantly ahead.





Central banks will be under pressure to use their balance sheets to keep term structures low to create and maintain fiscal space by keeping interest costs low. Stimulus that politicians find difficult to unwind raises medium-term inflation risks, so we remain attracted to maintaining a core exposure to inflation-protected securities.



We see government bonds as universally expensive. They may rally further if the COVID-19 crisis escalates further but are at risk of underperforming once the post-virus recovery is underway.





Cash Rates


Our expectation is that the yield curve will flatten given the cash rate will be anchored at 0.25% for at least three years and the RBA has a 0.25% target for the three-year government bond.


The RBA package included a cut in the cash rate to 0.25%, yield curve control via a 0.25% target yield for three-year government bonds and a fixed 0.25% three-year term funding facility for authorised deposit taking institutions worth at least $90bn. The RBA also stepped up repo operations and lifted the rate on exchange settlement balances held at the RBA from zero to 10 basis points (bps).


Global Markets



Wall Street analysts have sharply marked down their expectations for earnings this year. They now expect that profits for S&P 500 companies will fall 7.7 percent this year.

Quite possible for stocks to tumble 20 percent from where they currently sit.

Stand Aside.



In the U.S., the government’s virus containment measures mean a technical recession—negative GDP growth in Q1 and Q2—seems likely. Fiscal policy will be important in helping to offset the recession. The upcoming federal elections in November, however, complicate the political calculus around bipartisan agreement on a stimulus package. In addition, the economic turmoil caused by COVID-19 means Democratic frontrunner Joe Biden may have a better chance of beating U.S. President Donald Trump in the November election.





We believe a more neutral stance on European equities is warranted in the short term. However, improved valuations are supportive of maintaining an overweight strategic view.



COVID19 is a very substantial challenge to the Eurozone’s already relatively weak economic performance. Eurozone containment measures have been relatively strict, which will hit economic activity hard. Political hurdles to more coordinated and aggressive policy support is a challenge. The European Central Bank has been proactive and innovative in its policy approach to support bank liquidity and lending to the real economy and has increased asset purchases. The German government has engaged in very significant fiscal easing. Co-ordinated fiscal support has been very limited. There are some political hurdles to more aggressive policy support.





Valuations are very attractive, especially since the sharp selloff in March. Japanese authorities have implemented policy easing, including a sizeable fiscal stimulus package and liquidity measures/asset purchases by the Bank of Japan.

Stand Aside.



Japan: Equity valuations are consistent with our neutral weight strategic view, but downside risks to growth and relatively constrained policy space warrants a more neutral tactical view.





China: Loosening of quarantine restrictions may help the economy get back on track. We continue to prefer Asian EM to other equity markets and retain our Neutral weight.

Start buy.



In China, where the number of COVID-19 cases is on the decline, high-frequency trackers of daily economic activity show that economic activity is resuming. We also believe that government stimulus is coming. Local provinces have already announced infrastructure projects, and the People’s Bank of China has cut interest rates and the reserve ratio requirement several times.




Like This