Quarter in review: June 2020

After the fastest sell off in history from the peak on 20th February to the bottom on 23rd March, the Australian equity market rallied through the June quarter (up 16.8%), in line with global markets. The best performing sector for the quarter was Information Technology led by Afterpay surging into the top 20 stocks by market capitalisation. Here is a short summary of key events and market movements over the June quarter:

  1. Coronavirus – COVID-19 in Australia so far has not transpired to be as bad as the health experts had predicted. Globally however, the experts underestimated the impact with over 13m reported cases and a resurgence of the virus especially in the US. The growth in Australia’s active cases, until recently, were mainly from returning travellers in quarantine. Unfortunately, the mismanagement of this process in Melbourne has resulted in the Victorian outbreak. Progress has been made on a vaccine over the quarter with Pfizer’s vaccine candidate amongst many contenders (see Market Outlook section).
  2. Australian dollar & gross domestic product (GDP) – Due to the handling of the virus and the reopening of China’s economy the AUD rallied from 61c to nearly 70c over the quarter. In April S&P placed Australia’s AAA credit rating on negative outlook causing some concern but by June Moody’s affirmed their rating making Australia one of just 10 countries to retain its AAA credit rating through the coronavirus-induced global recession. By international standards, Australia (State governments and the Federal Government) has relatively low public gross debt of about 42% of GDP. Moody’s forecasts debt to GDP to exceed 50% by 2021 and rise modestly thereafter.
  3. Fiscal stimulus & Super withdrawals – The Australian government overestimated the cost of the Job Keeper take up rate revising the cost down to $70bn (from an initial $130bn). According to the Australian Bureau of Statistics, unemployment hit 6.3% with 1.5m Australians on Job Seeker program and only 130,000 jobs vacant. Hence the government is now talking about extending the program beyond September 28th to avoid a potential “fiscal cliff” and support industries such as tourism that will continue to be impacted by the border closures. As of June, the Government is providing $259bn or 13.3% of GDP in support for workers, households and business. Withdrawal from member superannuation accounts until June was a further $19bn. So where is the money going? The banks are releasing weekly EFTPOS data which shows gambling expenses are growing at triple digit rates year-on-year (yoy) and strong growth in household goods, hardware and even cars, with European car sales recording their best month of June for a very long time.
  4. Capital raisings – Equity raisings in 2020 are approaching A$30bn with the largest raisings this quarter from Qantas, Vicinity, Ramsay Healthcare and QBE which illustrates the diverse effect the COVID-19 fallout is having on the corporate sector.
  5. Global GDP – With central banks providing endless liquidity and devising new ways to support the economy coming on top of the unprecedented level of fiscal support, stock markets rebounded as restrictions eased and high frequency data showed improving economic activity. Global Purchasing Manager Indices rebounded strongly from COVID-19 lockdown lows led by China up to 58.4 in June. China is the only country that is expected to record positive GDP growth of ~2% for 2020. The MSCI All World index was up 16.3% in AUD for the quarter whilst the Nasdaq was up 31% with the index breaking through 10,000 for the first time to a new record high.
  6. Commodities – Commodities were led by gold with the price continuing to rally over the quarter as the bears were buying it for system failure/depression and the bulls were hedging against rampant inflation. The oil price partially recovered over the quarter as supply cuts took effect whilst demand improved from the COVID-19 lockdowns. Iron Ore remained strong during the quarter up 5% and above US$100 largely due to the pandemic hitting Brazil hard causing supply issues from the largest producer Vale whilst on the demand side, Chinese showed strong growth in steel demand.

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