Equity Market on Recovery Mode, Is the Market Bullish Too Early?

Summary

• PMIs are indicating that economic activity is improving. Recovery in the services sector has been promising, but manufacturing continues to lag.
• Easing restrictions have sparked recovery in the economy as well as in consumer sentiments.
• IMF has downgraded global economic forecast in the June edition, but it is predicting a lower level of contraction for Australia compared to the previous forecast in April.

Australian markets have not reached closer to levels seen before the March pullback, but there has been a decent recovery over the recent months. More than 40% of the index weight in S&P/ASX 200 Index includes financials, consumer discretionary, energy and real estate – sectors that are perhaps hardest hit by the COVID-19 crisis.

Incoming economic data will continue to reflect pain for some time, as lockdowns were at the peak in April. But the Australian economy has been reopening, and leading indicators are suggesting a revival in economic activities.

Australian Composite PMIs Show Expansion

As per the latest Commonwealth Bank Flash Composite PMI® for June, Australian private sector depicted revival in output, as businesses continue to embrace lesser restrictions amid the COVID-19 situation. Businesses continued to reduce employment due to unused capacity, but new orders stabilised.

Composite PMI came at 52.6 in June after clocking 28.1 in the previous month, indicating an expansion from contraction. Some firms that were closed earlier restarted their operations in June. Services sector posted the first rise in activity in five months, while the manufacturing sector was falling but at a slower pace.

New orders in the services sector improved marginally, as demand continues to be impacted due to the pandemic, and export orders continued to decline due to travel restrictions. New orders in the manufacturing sector contracted again.

Commonwealth Bank Flash Services PMI® was at 53.2 in June from 26.9 in May. It was noted that input costs and output prices increased for the first time in three months.

Commonwealth Bank Flash Manufacturing PMI® came at 49.8 in June from 44 in the previous month, indicating a slower rate of confidence. Manufacturing businesses continue to face supply chain disruptions, while input costs also increased, which was reflected by higher selling prices.

NAB Economics Data Insights Suggest Consumer Spending is ‘Levelling Off’

NAB’s consumer spending index indicates stabilisation, as per the latest data for the period until 20 June 2020. For the week ended 20 June, consumption spending increased 0.3% compared to four-week moving average at the beginning of the year (pre-COVID-19), but spending was 2.7% lower against the same period last year.

When compared to the pre-COVID-19 period, spending is higher in five states and remains lowest in ACT, WA and VIC. Spending in VIC and WA continue to improve, backed by easing restrictions. Except for NT and QLD, spending continues to be lower compared to the same period last year.

Must Read: Charting Out Australia’s Path to Recovery, Are There Any Bright Spots?

Spending in hospitality was down 31% compared to the pre-COVID-19 period, but recovery in hospitality continues with optimistic signs in the sub-industries. Compared to the pre-COVID-19 period, spending has recorded highest growth in construction, retail, and professional & tech services, but growth is now stabilising in these sectors. And, spending in the healthcare sector has improved by ~4% since beginning of the year.

NAB’s payment data suggests that inflows to merchants are slowing, standing at 2.1% higher for the week ended 20 June compared to the same period last year. Small firms have faced contraction in payment inflows, but the rate of decline has stabilised.

Westpac-Melbourne Institute Consumer Sentiment Index

Consumer confidence is back at the levels seen at beginning of the year, erasing dramatic falls recorded during the March-April period. Confidence has improved in states, as restrictions continue to be eased.

Despite impressive monthly gains, the index continues to be in ‘pessimistic territory’ by historical standards, which is down 7% over the same period last year. Family finances continue to remain under pressure.

Consumers see economy improving and concerns are coming down. Economy ‘next 12-months’ sub-index increased by 8.4% and ‘next five years’ sub-index went up by 6.4%, which with a reading of 102.4, was an 18-month high.

Consumer finances continue to remain mute with ‘finances vs a year ago’ sub-index at 77 below the long-term average of 89, indicating pressure on household budgets. However, consumer’s forward expectations are brighter with ‘finances, next 12 months’ giving a reading of 105.3.

Buying sentiment has gathered pace as ‘time to buy a major item’ sub-index posted an increase of 10.1%, which comes after a 26.7% gain in May. But the sentiment is still below the long-term average.

In June, Unemployment Expectations Index was down 7% after posting a decline of 13.4% in May, indicating that consumers expect unemployment to fall over the coming period. Consumer optimism around house price expectations improved, as House Price Expectations Index increased by 10.5% but is well below the levels recorded pre-COVID-19 period.

Respondents continue to prefer safer options for their savings with two thirds of consumers preferring deposits, superannuation or paying down debt.

IMF Lowers Global Growth Forecast

IMF now expects global growth to contract by 4.9% in 2020. The organisation anticipates that this time advanced economies as well as emerging economies could be in a recession for the first time since the Great Depression.

More importantly, IMF expects Australian output to contract by 4.5% this year, which is better than the earlier forecast of a 6.7% contraction. The organisation forecasts Australian economy to expand by 4% in 2021.