Monthly economic update with MLC, April 2020

Funds Management

by Clive Tompkins

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MLC Senior Economist Bob Cunneen discusses the relief rally in share markets during April and a range of indicators that will signal conditions are improving, from bond yields to traffic levels.

Global shares had a strong relief rally in April, and the global share market was up about 10 per cent. Now, this is a recovery after the March coronavirus crash, where global shares fell about 13 per cent. So it's an encouraging rally, but we are still in negative territory for the year itself.

Now, the reasons for that share market recovery in April were we had some positive signs in terms of the virus infection rate, particularly in Western Europe. So, signs in Italy and Spain that we've seen a peak, in particular. Hopeful signs that the lockdowns, the restrictions on moving in cities, will be curtailed, and therefore an opening up more of the economy. And thirdly, and importantly, what we've seen is very assertive central bank and government stimulus measures to support the global economy. So we've seen both income support measures to support employment. We've also seen central banks' asset purchases and the lowering of interest rates. So, these have been helpful for an April share market recovery.

Regrettably, the global economy looks like it's in a recession. For the March quarter, we've already seen signs that the American economy has fallen in terms of economic activity by 5 per cent on an annualised basis. And in Europe, it's been closer to 14 per cent. So, these indicate that a deep recession is occurring in both America and Europe.

But we have to bear in mind that share markets anticipate the future. So the share market's taking the view that, even though we have economic recession conditions at the moment, there are hopeful signs of a recovery.

Australian shares also made a relief rally in April with a 9 per cent gain. Now, there was an encouraging bounce in energy shares. They were up about 25 per cent. So, what we saw with the oil price was a stabilisation in late April, with Saudi Arabia and Russia agreeing to production cuts. We also saw a rebound in Australian real estate investment trusts. They were up about 14 per cent, but this comes after a 35 per cent fall in March.

However, bank shares were disappointing. So, if we looked at the financial sector shares, they're only up close to 3 per cent in April. And what we saw with the major banks were a reduction in profits, an increased provisioning for bad debts, and also a delay in dividend payments.

Regrettably, the Australian economy looks like it's already moved into a recession. What we're seeing in terms of falling car sales, weak business and consumer confidence, a collapse in job advertisements indicates that economic activity is contracting in Australia.

The Reserve Bank Governor, Dr Philip Lowe, made an important speech on April 21 which suggested that the Australian economy was likely to see an economic contraction of around 10 per cent by June of 2020, as well as a rise in the unemployment rate from the current 5 per cent level towards 10 per cent. So, these are recession-type conditions that are prevailing in the Australian economy at the moment.

The recovery signs. Beyond a sustained share market rally, we need to see other financial indicators support share markets. So, we need to see a rally in commodity prices, particularly copper and oil. We also need to see credit spreads narrow, so looking at investment grade and high-yield bonds around the world. We also need to see signs that the yield curve, the bond market is telling us that there are better times ahead.

But investors should also look for the daily anecdotal signs of that recovery. Some things to look for, in particular -- traffic volumes picking up speed, cafes and restaurants open and busy. So, these will be important signs of better times ahead.