March 31, 2020

March 31, 2020 | Adviser News


Economic update: COVID-19

Patrick Noble, Senior Investment Strategist at Zurich Investments

The Furious and The Fast

  • Central banks around the world unleash a barrage of unconventional lending facilities and asset purchase programs to alleviate pressure points in the financial system.
  • In turn, further support is provided by generous fiscal programs. In the US, “Phase 3” fiscal legislation was passed, totalling in excess of $2 trillion. The Australian Government announces $130 billion in “JobKeeper” payments. Further measures are expected targeting rental assistance.
  • Unemployment set to rise dramatically. A record number of initial jobless claims is announced in the US, dwarfing global Covid-19 infections.
  • Boris Johnson confirms he has contracted coronavirus.
  • The Australian share market rallies off its recent lows but lags the recovery in global equities.

Led by the US, equity markets staged an incredible turnaround to the week ending 27 March. Only one week prior, global share markets had plunged in one of the most furious sell-offs in history, entering bear market territory. Then just one week later, and in spite of climbing rates of COVID infections around the world, equity markets staged perhaps one of the fastest (technical) bull markets on record, with the Dow Jones briefly rising more than 20% off its lows.

Sentiment lifted notably after central banks and governments around the world announced an arsenal of programs designed to support individuals and broad sectors of the economy over this period of “hibernation”. No doubt the policy support is a welcome development however it may still be premature to call the end of the bear market. Volatility remains near extreme levels and the impact of measures implemented to halt the spread of coronavirus are a long way from being fully understood.

Set Phases to Stun

Sadly however, that impact can be seen on the large swathes of the workforce who are now without a job. A staggering 3.23 million people filed for initial jobless claims in the US for the week ending 21 March.

The “Phase 3” stimulus bill approved late last week in the US will throw more than $2 trillion dollars back into the economy which includes cash payments to individuals and expanded unemployment benefits. But with isolation policies now pushed back by an additional two weeks in America, it is likely that unemployment in the US and abroad will continue to climb along with the escalating cost of further economic spending packages.

Unemployment will continue to rise in Australia too. Myer most recently joined a long list of retailers announcing they will be shuttering their stores for a period of four weeks. Tensions will also continue to simmer away between tenants and landlords. Last week Premier Investments announced that it would be closing all its Australian stores and would not be paying outstanding rent while its shops remain closed. The Australian government’s “JobKeeper” wage subsidy announcement will be closely scrutinised by both workers and businesses alike. Up to 6 million people are expected to be eligible for a $1,500 wage subsidy paid fortnightly by their employer.

What Does This Mean for Mall Valuations?

Rent relief is expected to be another key pillar of future government policy covering both residential and commercial leases. But given the current uncertainties on rental income and even tighter social distancing restrictions, it is not surprising that the share prices of the mall operators remain under significant pressure.

But value could be emerging. Even after accounting for a significant earnings shock over the coming year and heightened vacancies, many of the top mall operators appear to be trading on large discounts to NAV. Please CLICK HERE to hear more from Renaissance Property Securities, manager of the Zurich Investments Australian Property Securities Fund.

 

Important information: The content of this publication are the opinions of the writer and is intended as general information only which does not take into account the personal investment objectives, financial situation or needs of any person. It is dated March 2020, is given in good faith and is derived from sources believed to be accurate as at this date, which may be subject to change. It should not be considered to be a comprehensive statement on any matter and should not be relied on as such.  Past performance is not a reliable indicator of future performance and should be used as a general guide only. Neither Zurich Australia Limited ABN 92 000 010 195 AFSL 232510, nor Zurich Investment Management Limited ABN 56 063 278 400 AFSL 232511 of 5 Blue Street North Sydney NSW 2060, nor any of its related entities, employees or directors (Zurich) give any warranty of reliability or accuracy nor accept any responsibility arising in any way including by reason of negligence for errors and omissions. Zurich recommends investors seek advice from appropriately qualified financial advisers. Zurich and its related entities receive remuneration such as fees, charges and premiums for the financial products which they issue. Details of these payments can be found in the relevant fund Product Disclosure Statement. No part of this document may be reproduced without prior written permission from Zurich.

Past performance is not reliable indicator of future performance. GINN XYY9MQ.00000.SP.03. PNOE-015455-2020

For previous updates, click below:

❯  16 March 2020
❯  23 March 2020

To hear directly from our Fund Manager partners on their views, click the links below:

❯  American Century Investments

❯  Celeste

❯  Lazard

❯  Renaissance