Australia in recession – what does it mean?
The Coronavirus pandemic has had a costly impact on world economies – one that has pushed individual countries, including Australia, into recession. But what does this all mean?
The Coronavirus impacted businesses, households and individuals worldwide, resulting in the shutdown of much of the world’s economy. In response to the rapid slowdown in economic activity, investments experienced volatility on an unprecedented scale. But to help stabilise conditions, world governments and central banks deployed billions of dollars’ worth of financial support and monetary policy stimulus – leading to a slow recovery in financial markets. So, what could happen next? As we approach the half-year mark, our Investments team reveals where investment opportunities could exist and shares insights into the possible path to recovery for financial markets in the future.
The safer the investment, the lower the potential returns – so when it comes to investing in the current low interest rate environment, investors may need to consider their need for safety with their desire for higher returns. This applies to traditionally conservative fixed interest investments such as government bonds (lower risk for lower return) and corporate bonds (higher risk for higher return). Looking ahead, safer government bonds will likely remain flat over the near term. But there may be investment opportunities available at the higher end of the risk spectrum – particularly corporate bonds, which are riskier and have the potential to default on their payments to investors.
Within the alternatives asset class – which comprises a range of “alternative” investments that don’t conform with traditional investments, such as commodities (like oil and agriculture) or currency – there are risks but also investment opportunities. A particular area of focus for managers of alternatives funds will be identifying new risk management tools and risk mitigation strategies for portfolios. That’s because traditional hedging strategies (which involve strategically including defensive assets to help offset or lower risk) weren’t particularly effective last quarter. For example, there may be some discussion about gold as a better hedge in portfolios compared to the US Dollar given the high level of debt the United States currently holds – reportedly in the trillions of dollars.
As lockdowns gradually loosen and as people transition back into society, we are seeing signs of a recovery across transportation infrastructure stocks hit hardest by social-distancing and lockdowns – i.e. toll roads and airports. However, some people may continue staying indoors and working from home. So over the coming months, this could mean a persistent demand for utilities servicing residential premises and telecommunications towers – sectors that retained their strength when the broader market was volatile. After the pandemic impacted how people travel and gather, the values of some of these investments were discounted. This means that in the current low interest rate environment, there may be opportunities to access infrastructure investments at a lower price.
In coming months, we could see continuing challenges for property – particularly the retail sector which, prior to the Coronavirus, already struggled with the shift away from physical shopping centres and toward online retailers. This trend, accelerated by the pandemic, could benefit industrial property for warehousing. The good thing is that property is an adaptive and convertible asset class that comes in all shapes and sizes, meaning we could see unused retail space converted into office or residential buildings in future, particularly for property hotspots in CBDs, though this may be offset by an oversupply of office space as a result of changing working habits.
Progress is unlikely to be linear in future, and it’s possible that there will be a sharper recovery in some market segments compared to others. For example, parts of the Consumer Discretionary sector have begun showing strength, particularly domestic air travel and tourism stocks like Webjet or Flight Centre as Australians are slowly able to travel again – even if only nationally. Casinos could also rebound when lockdowns are loosened. So far, the likes of Crown and the Star have significantly cut operating costs and are preserving their cash while readying themselves to reopen. Across other areas, iron ore has remained resilient as Chinese demand has remained strong, but this has the potential to change given the escalation in trade tensions between China and Australia. And banks could continue to face challenges as reflected in the higher provisions they’ve made for Coronavirus-related losses – with some banks reducing or deferring their dividend payments.
Given the uncertainty surrounding the world economy, financial markets appear to favour sectors and industries that can continue operating in this non-standard environment. For example, strength has been observed across the Information Technology sector and for companies that have been able to continue operating regardless of the circumstances. This was also noted for the Healthcare sector as companies raced against the clock (and each other) to improve testing solutions or to develop a vaccine. Compared to developed nations, emerging markets may face more challenges due to the less developed state of their infrastructure and health facilities. Their recovery could depend on how well they are able to manage the pandemic from an economic perspective, with governments needing to provide large financial stimulus support to fill the void of lost economic activity.
The pandemic has highlighted the interconnected relationship between world economies and financial markets – each of which were impacted in unique ways. As a result, some investments haven’t performed the way they normally would, suggesting that a recovery for some asset classes may differ from previous experiences – for example, following the Global Financial Crisis.
But while there are still many unknowns, what we do know is that the path to recovery in markets will depend largely on how quickly world governments can curb the spread of the virus to reopen their economies and restart activity. At this time, governments continue working towards carefully balancing the health of their economies with the health of their citizens. So, considering the above developments, our consensus for a global recovery is a slow one that extends well into 2021.
As conditions continue to unfold, our team continues to communicate closely with investment managers to identify the risks and opportunities in markets and help members achieve their individual retirement goals. Before making any changes to their investments, it can be important for members to consider their risk appetite, wealth objectives and seek appropriate financial advice.
The Colonial First State Investments team regularly shares timely news and insights on investing and developments in financial markets – visit the website for more.
After experiencing unprecedented volatility in the March quarter, markets made a strong recovery – with investors becoming more positive about economic reopening efforts and support from world governments and central banks. Senior Investment Manager George Lin recaps the June quarter.
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