Monthly economic update with MLC, August 2020

Funds Management

by Clive Tompkins

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MLC Asset Management Senior Economist Bob Cunneen discusses share market gains against a backdrop of rising virus cases.

Why did global shares generate a strong 5.8% gain in August?

Global share markets delivered a strong return in August of nearly 6 per cent. And this was largely led by Wall Street. So, if we looked at the benchmark Standard & Poor's 500 Index, so the largest capitalised stocks, they were up nearly 6 per cent. And if we looked at the NASDAQ, so the technology-heavy index itself, that was up nearly close to 10 per cent. So, your Facebooks, Apple, Amazon, Netflix, Google-type shares recorded very robust returns. Now, there were a couple of key drivers for this positive performance. Firstly, some very optimistic news on the global recovery story in July. So, what we saw in terms of purchasing managers’ indexes was supportive of a better quarter than what was the global recession conditions in the June quarter. There were also some hopeful signs on the virus. So, there's been some promising results in terms of the vaccine development, such as that produced by Oxford University and Moderna. So, these are encouraging investors that maybe we are past the worst in terms of the virus impact on global share markets.

How are global shares making such strong gains while virus infection cases continue to rise?

This is a puzzle, in the sense that we still have, on a global scale, rising numbers of infection cases. It's particularly problematic in Brazil and India, but we are also starting to see surges in places that we thought the virus was contained, such as France, Italy and Britain. So, the virus is still a threat. However, investors have taken the view that most of the damage has been done in terms of its impact on economic activity. They've also taken the view that, given that central banks have been very aggressive in terms of their policy support measures... So, if you think about lower interest rates, central banks expanding their balance sheets with asset purchases, buying corporate bonds and government bonds, that is seen as very supportive of a global recovery story, and eventually a global corporate profit recovery story.

Are there concerns that could trouble investors over the coming months?

The key concerns about global share market optimism at the moment is that the vaccine that is currently being developed around the world doesn't actually work. It's not effective. It's not safe. The second concern is that we have an environment where some governments are contemplating whether they should extend their support packages. For example, the US Congress has not passed extensions on unemployment insurance benefits. We've also seen, in Australia's case, that the JobKeeper package has been tapered back, so that, for a full-time employee, from the end of September they will lose the $1,500-per-fortnight support package. It'll be reduced to $1,200. So, these are all measures that have been very helpful in the past, but they may be reduced in the future.

Why did the Australian share market generate a solid 2.8% gain in August?

Australian share markets delivered a solid gain, but it wasn't as spectacular as Wall Street. So, Australia’s share market was up nearly 3 per cent in August, and that was really driven by the strong performance by the technology sector. So, if you looked at Australian technology shares, such as WiseTech and Afterpay, those particular shares were up nearly 30 per cent, and the technology sector itself was up 15 per cent in August. We also saw a rebound in some of the consumer discretionary stocks. For example, Flight Centre was up 25 per cent on hopes of an eventual turnaround in global travel. Against that, some sectors did disappoint. So, if you looked at the communications and the utility sector, there were down between 4 and 5 per cent. We had some disappointing results from Telstra and AGL.

How is the Australian economy performing?

Regrettably the Australian economy is still putting in a mixed performance. So, in terms of employment and retail spending, we've had some encouraging data for July. And that suggests that we are at the early signs of recovery, bearing in mind that, for the June quarter, Australian GDP did fall 7 per cent, which is the largest contraction in GDP since 1959 when the records began. So, July's data is encouraging for the recovery story. Against that is the fact that our unemployment rate still remains elevated. It's currently around 7.5 per cent. Also, what is a concern at the moment is consumer sentiment is starting to pull back. We're seeing, with the Westpac-Melbourne Institute survey in August, a fall in consumer sentiment. And there are concerns, obviously, about the Melbourne lockdown situation being extended. We've had an announcement in early September that that lockdown situation will be extended to the end of September, with a very gradual relaxation of those lockdown restrictions dependent on a continued fall in new virus cases. So, that has cast doubt about the recovery story for the Australian economy, and that needs to be watched by investors.


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