September 03, 2020
September 03, 2020 | Adviser News
It may be feeling more like summer, but winter is coming.
Matthew Drennan, Head of Savings & Investments
A lot of the working population are holding up pretty well financially so far during the pandemic. The chart below from Macquarie Research shows the sharp spikes in household cashflow driven by Government benefits and early superannuation withdrawals. Two elements of this – the second round of one-off $750 Government support payments and early super withdrawals - are unlikely to be repeated going forward. It is highly unlikely the early release of Super scheme will be extended, especially given calls from some union quarters that the Government should top up super for low income earners to cover their withdrawals. (Strange, I thought it was the individual who made the call to withdraw early, it wasn’t compulsory like contributions to super are). Of course, for some people this was a necessary evil to bridge the cashflow gap as (effective) unemployment rates soared. Regardless, this bounty has now come to an end.
So too for JobKeeper and JobSeeker payments, both of which are scheduled to be reduced. JobKeeper will be reduced in both absolute dollar terms and the breadth of industries it covers after September. Once people are forced to begin looking for work again Treasury expect the published unemployment rate to peak at circa 10%. Treasury anticipate that the number of workers on JobKeeper will fall from 4 million – nearly 40% of private-sector workers – at the end of Q3 to 1.75 million at the end of Q1 2021. An ABS survey of 2,500 Australian households in June found that 35% had received a Government COVID-related stimulus payment. 32% of households said that they mainly used the cash to pay household bills, while a smaller percentage had added it to savings.
Source: ABS, APRA, DSS, Treasury, Macquarie Macro Strategy
Finding work with small and medium enterprises (who represent circa 85% of employment in Australia) will be very difficult as many will go to the wall from a combination of reduced or zero JobKeeper payments to supplement staff wages and an end to rent holidays on their premises. Banks will see a marked increase in bad and doubtful debt provisions as a result of the combination of mortgage arrears and business bankruptcies.
Net Exports Our Saviour?
One bright spot in the midst of this gloom has been next exports which are booming. These have kept GDP from printing even worse numbers than it already has, just like the Global Financial Crisis. (Yes, sadly the efforts of Rudd Govt – pink batts, etc- contributed very little to economic growth and at a huge cost). But will this continue?
Part of the answer is that Australian imports will grow again as the world opens up, gradually reducing the positive GDP impact. But our exports are the real story.
Now that education and tourism are in the gurgler, the major export still growing is iron ore. Most of this goes to China. As we heard recently in a speech at the National Press Club by Deputy Ambassador Wang Xining, Australia “hurt the feelings of the Chinese people” for suggesting an independent enquiry into the source of COVID 19 amongst other insults such as calling out China on political interference, cybercrime and annexing the South China Sea. This has led to retaliation in the form of tariffs on our beef, barley and wine exports. Fortunately, in the case of iron ore, with Brazil temporarily in a huge mess, the Chinese have nowhere outside Australia to turn to purchase this commodity in the volumes they require.
But if you thought they were upset by previous slights, the recent announcement by the Morrison Government to use its external powers under the constitution to vet and approve / deny ANY past or future agreement between institutions and foreign powers takes the tensions to a whole new level. This is principally aimed at China and I suspect will initially target university staff collaborating on sensitive research with Chinese institutions as well as the highly controversial Victorian agreement to participate in China’s Belt and Road Initiative. The threat to Australia’s intellectual property rights and system of Government are very real and, if reports about the pending legislation are even half accurate, so is the remedy.
China is already furiously developing iron ore assets in Africa and once Vale in Brazil is fully back online, expect Australia to be hit by reduced demand. This is not a likely scenario in the short term, but as we know China doesn’t play the short game. And it doesn’t forget. It’s key then that Australia works tirelessly to foster other trading relationships in India and SE Asia.
But In the Midst of all this Equity markets are Booming, right?
Remember the TMT bubble in the late 1990’s? Hmm…
As Apple’s market capitalisation surpassed $2 trillion dollars (yes that’s a T not a B) in August, equity market and portfolio concentration remains a key risk for investors. The five largest US stocks – Facebook, Amazon, Apple, Microsoft and Google – now account for 23% of the S&P 500 index. There are still opportunities in global equities, you just need to focus outside the obvious and overpriced. (Read more on this in ‘Fangin’ IT’ by Patrick Noble, Senior Investment Specialist)
Australia by contrast has a tiny technology sector (though also achieving outsized gains if the share price performance of Afterpay is anything to go by). Even with recent gains we remain almost 7% below our previous peak. Still, this has been a very rapid market recovery.
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