The Month in Review - Jun 2020
Monthly Review
Farrow Hughes Mulcahy Investment Research 07 July 2020
In June markets were mixed with the ASX 200 rising by 2.6% but the MSCI world Au. falling -1.0 %.
Published economic data continues to be positive. Jobs data is strong, which has supported the market. On the employment front “Hours Worked” (+8.3%) and “Household Employment” (+6.6%) surprised to the upside. Similarly, the PMI diffusion indices are heading in the right direction indicating a stronger growth momentum than many anticipated. We are now looking at an 8% drop in US Q2 GDP versus an 11% to 12% drop, as most estimates suggested we were facing a few months back. Still a lot to make up, but significantly better. Clearly interest rates will continue to be supportive.
However, there is still some evidence that things are slowing. Markets must gauge not only the economic effect of the lockdowns, but a perception of risk that is deterring consumer spending. A recent University of Chicago study concluded that sentiment rather than the lockdowns themselves are the biggest headwind. For example, we know that only around half of the stimulus has been spent so far. This is something to keep watching in the US and Australia.
There are signs of this slowdown coming through in the last week in the worst-affected states of Florida, Texas, California and Arizona, which make up about a quarter of the US population. For example, restaurant bookings in the Open Table app tapered off quite sharply last week after a post-lock-down recovery.
Cases in the US continue to rise and hospitalisations are increasing though they remain below the previous peak and deaths are still low. In Florida overall numbers are worse, though there is less strain on hospitals. In contrast, Phoenix and Houston are close to ICU capacity. We are now seeing “surge plans” implemented in many of these cities such as LA, including the deferral of elective surgery.
As bad as it feels with the negative news flow around rising COVID cases in Australia and parts of the US, the market hasn’t responded as some may have expected and has continued to grind higher. We are now at a juncture where:
•We could see a more significant leg down if case load data continues to worsen;
•But if evidence emerges that virus management has improved, we could get squeezed higher — bearing in mind that overall market positioning has turned more defensive.
Vaccine news flow is positive
One positive consequence of rising cases is the acceleration of some Phase 3 trials. There is some talk of the first batches being available before year-end.
The three main trials are:
1. Moderna
2. Aztrazeneca (in partnership with the University of Oxford)
3. Pfizer (four variants of a vaccine in development)
Pfizer has just released results of Phase 2 trials on one of its vaccines, which indicate a) the drug is safe to use and b) it is triggering an immune response. This means it can progress to the final Phase 3 trial, which will be 30,000 patients. The rate of new cases actually helps determine the efficacy of the vaccines.
In the best-case scenario, the drug will be approved by October. Pfizer estimates it could produce 1.2 billion doses in 2021, which would equate to 600 million treatments. This shows the problem likely will not be solved by a single vaccine. To meet demand, we will likely need several vaccines to be approved.
The recovery going forward will likely be slower than the “Deep V” rebound seen so far in some data as second wave fears will add to consumer caution, the easy gains from reopening may have mostly been seen and even if there is a vaccine soon the coronavirus shock has accelerated the shift to a digital world and cost cutting associated with automation will drive a long tail of unemployment which will constrain growth.
After a strong rally from March lows shares remain vulnerable to short term setbacks given uncertainties around coronavirus, economic recovery and US/China tensions. But on a 6 to 12-month horizon shares are expected to see good total returns helped by a pick-up in economic activity and massive policy stimulus.
The Australian housing market has slowed in response to coronavirus. Home prices are falling and higher unemployment, a stop to immigration and rent holidays pose a major threat to property prices into next year. Home prices are expected to fall by around 5 to 10% into next year, with the risk of bigger falls if the renewed rise in coronavirus cases leads to a renewed generalised lockdown and/or government support measures are prematurely withdrawn.
Cash & bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.25%.
Source: Pendal, AMP Capital.
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