The New Normal for Investors: Mismatch between Equity Prices on ASX and Economic Milieu

Summary

• Despite the Australian economy spiralling downward, the stock market has shown an upward trend, driven by measures taken by the government towards the economic revival.
• Performance of AU currency and S&P/ASX 200 VIX is reflecting a positive market sentiment.
• Household consumption and employment are expected to take a dip in H1’ 2020; however, the prospect of economy looks bright with a positive GDP growth forecast of 7% for H1’ 2021.
• Assuming international trade and strategic relations to remain strong in future, the Australian stock market is expected to recover and grow beyond the 7000 mark.

Australian economy has been impacted badly due to the COVID-19 pandemic and bushfires with the stock market hitting rock-bottom in March 2020. Since then, the stock market has shown an upward trend, indicating investor confidence on the revival of Australian economy. Let’s dig deeper to understand disparity between the rising stock market and grim economic setting.

THE S&P/ASX 200 Index Performance

S&P/ASX 200, the representative index, crossed the 7000 mark in January 2020 and reached a record high of 7162.49 on 20^th February 2020, only to take a steep fall, as COVID-19 struck the economy. The Australian share market had its worst day for the year on 23^rd March 2020, reaching 4546.03.

Since then, the S&P/ASX 200 index has been showing steady progress. The month of May has seen stupendous growth. The share market reached 5998.7 on 5^th June, an increase of around 11% M-o-M and a 4.2% weekly increase. On 9^th June (AEST 12:51 PM), the benchmark index was further advancing by 2.33% or 139.7 to 6,138.4.

The AU currency has also shown resilience and hit its high of US70.31c on 8^th June to close at US70.20 cents. The close was 22.26% higher than the lowest dip in the year till date at US57.42c on 19^th March 2020.

The S&P/ASX 200 VIX, the index that represents market sentiments, is also experiencing a dip and closed at 20.777 on 5^th June, showing positive investor sentiments towards the market. The increasing stock market performance is driven by government's steps to reopen the economy and lift coronavirus restrictions gradually through three phases.

Also read: 5 Tips for dealing with reopening of the economy during COVID-19

Current Economic Conditions

Australia started placing restrictions from 1^st February 2020 starting with international travel. By March end, restrictions increased to the closure of non-essential services, gatherings and other social distancing measures.

April 2020 witnessed Australian retail turnover decrease by 17.7% M-o-M on seasonally adjusted terms, according to the Australian Bureau of Statistics (ABS). The decrease was because of continuous impact of COVID-19 restrictions related to social distancing on businesses, pushing them to close their physical stores. Cafes, takeaway food services and restaurants experienced a record fall of 35.4% while businesses of personal accessory retailing, clothing and footwear were down by 53.6%. Department stores turnover dipped by 14.9%. Food retailing experienced a dip of 17.4%.

Online retail sales surged in April 2020 due to closure of physical stores in some industries. Online sales of clothing, footwear and personal accessory, household goods, department stores, and others accounted for more than 20.5% of overall sales.

The tourism sector also got severely impacted by the COVID-19 restrictions, owing to social distancing and ban on both domestic and international travel. According to data released by ABS, Australia recorded its largest decline in overseas travel with visitor footfall decreasing 60% Y-o-Y in March 2020.

International trade has also suffered with China being the largest partner of Australia.

According to the RBA, economy is anticipated to record around 10% contraction in GDP in H1’ 2020. RBA has forecast household consumption to decline by ~15% with unemployment rate to rise to 10% in the June 2020 quarter, both down from the previous forecast of the central bank. A 20% decline in total hours worked has also been projected.

Also Read: Australia Records Trade Surplus of $8,800 Million in April 2020

Economic Reforms

To lead the economy towards recovery, the government has introduced many financial and support packages. The government has planned a three-step gradual opening of the Australian economy by easing of COVID-19 restrictions.

A $1 billion has been allotted as the COVID-19 Relief and Recovery Fund, to aid industries, along with regions and communities impacted by the coronavirus crisis, with the fund supporting business operators from various industries such as aviation, agriculture, fisheries, tourism and the arts. Through its economic reform package, the government is targeting to help businesses for managing cash flow issues.

The government is providing financial assistance to individuals and households such as jobseeker payments and household support payments, homebuilder grant, and free childcare, which may elevate household consumption.

Also Read: Is it Too Early to Reopen Businesses? A Take on Economy vs Public Health

Future Outlook

According to RBA, GDP outlook for the second half of 2020 remains uncertain and depends upon how long social distancing rules remain in place. Overall, RBA has forecast negative GDP growth of 6% for the second half of 2020, which is projected to reach 7% in the first half of 2021 ending June.

With Australian economy reopening and economic reforms announced, future of the Australian economy looks green. Assuming international trade and strategic relations to remain strong in future, the stock market is expected to rebound to 7000 mark and grow beyond.

Disclaimer: All the currencies mentioned are in AUD unless specified