April 30, 2020 Guy Carson

ARE WE THROUGH THE WORST?

BY GUY CARSON – INVESTMENT SPECIALIST

In recent weeks financial markets have rallied off the lows seen in March. Investors have looked upon the recent selldown as an opportunity and have been taking advantage of the lower prices. However, we are not sure that we are through the worst from an economic point of view and expect more uncertainity in the near future at the very least.

From a health point of view, it now appears most if not all countries have taken control of the virus and “flattened the curve.” From the chart below we can see the trend in new cases has now either flattened off or started to decline.

This flattening has been as a result of lockdowns. Now the challenge has come of how to restart the economy without risking a second wave. This challenge is likely to mean the jobs lost in this short period of time will take longer to return.

In the US, we have seen almost 22 million people lodge unemployment claims over the last four weeks. That is equivalent to over 13% of the workforce.

Data released yesterday in Australia tells an interesting story. 781,000 people (6% of the workforce) lost their job between 14 March and 4 April. The hardest hit sector was Accommodation and Food Services followed by Arts and Recreation. These sectors have had to shut down and hence the job losses are significant. However, all sectors saw a reduction in job numbers. Even Construction, which was considered essential, saw jobs fall 5.3%.

Globally, we are seeing the single fastest rise in unemployment in recorded history. Some of these jobs will come back, but not at the speed they have been lost. Large crowds will be avoided and this will restrict trade for restaurants and bars. A study by Scout 360-Horizon Media in the US found that 60% of fans won’t feel comfortable going to a sporting event for at least a couple of months after getting an “all clear.”

Entire industries such as international travel will be very near to shutdown until a vaccine is ready and able to be deployed. Most countries will require a vaccine certificate in order to grant entry.

This suggests that “normal life” will be some way off. So, whilst GDP will partially rebound in the 2nd half of the year, it won’t recover all of its fall.

Corporate earnings are in effect a leverage play on GDP. At the time of writing, the S&P has fallen 34% and then risen 28.5% to be around 15% down from its all-time high reached in February. GDP is expected to fall by at least this much, meaning that profits will fall more. The current pricing of the market therefore looks too optimistic with investors seemingly banking on a sharp economic recovery.

In fact, with the lockdowns, the impact on earnings is virtually impossible to estimate currently and most companies have withdrawn previous guidance. The impact on balance sheets due to a lack of cash flow is also going to be significant and plenty of companies are raising new capital and diluting their current share base.

Government intervention has been significant and central authorities are attempting to keep businesses and households afloat. However, loss of income over this period will have an impact on the economy and society. There will be outcomes that are hard to predict and as a result asset protection becomes particularly important.

In addition, uncertainty makes this a difficult time to invest. We are in constant communication with our investment advisors and have been monitoring portfolios actively. If you wish to discuss your investment portfolio please contact Guy Carson at gcarson@southpacgroup.com.

Disclaimer: The above contains the opinion of the author and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

Guy Carson

Guy Carson is Southpac's Investment Specialist. Guy manages Southpac’s external relationships with investment advisors and banking specialists in client relevant jurisdictions around the world. In addition he works with clients to find the most appropriate solutions for their circumstances.
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