Monthly economic update with MLC, May 2020

Funds Management

by Clive Tompkins

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MLC Asset Management Senior Economist Bob Cunneen discusses the continuation of the May share markets rally in Australia and overseas in anticipation of a reopening of economies, despite COVID-19 infections accelerating in Latin America.

Global share markets delivered a strong +4% gain in May, and it was basically building on the gains in April after the coronavirus crash that we had in March.

Now, there are some promising signs, in particular in Europe and the United States, that there has been a peak in the rate of new infections with the virus. There are also signs that governments are starting to relax restrictions in both Europe and the United States, and the share markets are anticipating a recovery with the relaxation of these restrictions.

We've also seen very positive support measures by central banks and governments. So, if we consider interest rates near zero, central banks buying government bonds, and also providing funds to financial institutions to support lending, as well as various government stimulus measures, such as income and wage subsidies, these are all promising developments that the global share market has taken comfort in.

We need to be careful that, if we look on a global scale, there is still an acceleration in the rate of new infections with this virus. It is particularly problematic in Latin America, India and Iran. So, until the virus is fully contained, until we have an effective vaccine that is widely available, the virus is a threat.

In terms of the share markets' gains compared to the very bleak news that we've had globally, in terms of recession conditions prevailing in both Europe, China and the United States, the share market tries to anticipate the future. So, the share market is starting to price in the recovery story. But we need to be conscious at this stage with the economic data, it still remains bleak. So, rising unemployment, falling retail sales indicate that deep recessions prevail around the world, but share markets are anticipating the recovery.

Australian share markets delivered a strong +4.6% gain in May. This was driven by some very strong performances out of information technology, which was up about 14% on the back of Wall Street's strong performance. We also saw very strong gains in key commodity prices, such as iron ore, copper and gold, which supported our resources sector. It was up about 8%. And we saw a bounce back in bank shares in particular. So, the financial sector shares are up about 5%, with signs in Australia, in particular, that the virus was contained, and therefore the government could start to open up the economy and relax restrictions.

Regrettably, the news on the Australian economy remains weak and consistent with a deep recession environment. For April itself, we had the loss of nearly 600,000 jobs. The unemployment rate went above 6%. Underemployment, which is a measure of part-time workers wanting more hours, went closer to 14% in Australia. We also saw an 18% fall in retail spending. So, these measures indicate a very deep recession in Australia currently.

But the Australian share market, like the global share market, is anticipating a recovery. There are some tentative early signs of a recovery if we look at business and consumer sentiment measures. So, what we're starting to see is those measures are stabilising, which indicates that potentially we have a recovery on the horizon.