Five Trends Spinning Revival in Equity Market Amid Economic Uncertainty

Summary

• Global equity markets, including ASX are rebounding from March 2020 crash despite existing economic challenges.
• Projection concerning the worst is already over for Australia in fueling optimism in equity market to some extent.
• Australia has emerged as the role model in effectively containing the COVID-19 spread, reviving hopes of a sooner than expected economic revival.
• Government and RBA’s robust policy measures are bolstering positive investors’ sentiments.
• Opportunities are emerging in different sectors harvesting the fruits of soared demand for products and services amidst social distancing.

IMF expects the global economy to contract by 3 per cent in 2020 amid COVID-19 containment efforts, marking a steepest downturn since 1930’s Great Depression. Assessing the economic impact of coronavirus on the US, Federal Reserve Chair recently warned that unemployment could peak at 25 per cent in the US. Besides, the latest economic data suggest Japan’s economy has officially marked an entry into recession for the first time in the last four and a half years.

In addition to these economies, the RBA anticipates Australian economy to face a contraction of 10 per cent in GDP over 1H 2020, with unemployment rate hitting a level of 10 per cent by June 2020.

At the time when economies are screwed up while battling against COVID-19, equity markets across the world are rebounding strongly from the stock market crash experienced in March 2020, as shown in the below table:

The upbeat spotted in the equity market gives rise to the question – ‘Why are markets scaling up when economies are in dire straits’? The answer to this query lies in the big difference between the economy and equity market - the stock market is forward-looking with share prices being majorly driven by projections! This implies that even if the economy is at bay, the equity market can experience a rally in case the economy performs better than expected.

Moreover, there are several factors other than economy that drive equity market movements, including natural and man-made disasters, company-specific factors, investors’ psychology, government policies, market sentiments, political shocks, public health crisis and commodity market movements.

Having said that, let us discuss five such factors driving optimism in the Australian share market:

Speculations that the Worst is Already Over

With some economists projecting the worst is already over for Australia and the economy will recover from here, investors appear to be quite optimistic about the nation’s future. On the bright side, the IMF anticipates Australia to observe V-shaped recovery from COVID-19 crisis, with economy experiencing a sudden fall of 6.7 per cent in 2020, followed by a sharp lift of 6.1 per cent in 2021.

Though experts view IMF’s forecast as too optimistic, the speculations over Australia’s speedier recovery are driving optimism in the nation’s share market to some extent.

Treasury Secretary, Mr Steven Kennedy has recently ruled out chances of a V-shaped recovery; however, he has also discarded likeliness of an L-shaped recovery for the country. Instead, he believes the role of fiscal policy will be of greater significance in determining the shape of recovery in the months and years ahead.

Flattening of COVID-19 Transmission Curve

Emerging as the role model in effectively containing the COVID-19 spread, Australia has successfully flattened the coronavirus transmission curve by means of stringent social distancing measures and suppression approach.

The nation has so far reported ~7,173 cases and ~103 deaths, which is considerably lower than the other advanced economies of the world. Moreover, the country has one of the highest testing rates, with more than 1.39 million tests conducted till date across different states and territories.

As a consequence of successful containment of virus spread, the Morrison government has prepared a three-phase action-packed plan to attain a coronavirus safe economy by July 2020.

To Know More, Read Morrison Government’s 3 Step Reopening Plan for Economic Recovery

The flattening of coronavirus curve and the government’s comprehensive plan are reviving hopes of a sooner than expected economic revival in Australia.

Government’s Economic Response to COVID-19

The Australian government has so far injected ~$259 billion in fiscal and balance sheet support, representing around 13.3 per cent of the annual GDP. Out of this, around 6.9 per cent of the GDP account for direct fiscal measures.

Owing to a reporting error in estimating the number of people likely to access the JobKeeper scheme, the JobKeeper package was initially announced at $130 billion. However, recently the Treasurer notified that the wage subsidy program would cost the government ~$70 billion instead of $130 billion, offering a considerable boost of $60 billion to the government.

The government’s economic response package has been designed to deliver timely support to businesses, workers and communities affected by the pandemic, setting a solid foundation for the economy to revive as soon as the crisis passes.

RBA’s Response to the Pandemic

In addition to the government, the RBA is also leaving no stone unturned to bring economy back on track. The central bank has so far taken several measures to support the flow and lower the cost of credit in the Australian economy, which include:

• Lowering the Cash Rate Target to 0.25 Per cent
• Targeting a 3-year Australian Government Bond Yield of Around 0.25 Per cent
• Providing a Term Funding Facility for the Banking System, to Support Lending to Businesses
• Injecting Liquidity to the Financial System
• Providing Liquidity to the Government Bond Market
• Establishing a Foreign Exchange Swap Line to Support US Dollar Funding

Must Read! RBA: Negative Interest Rates Extraordinary Unlikely, Less Severe Economic Downturn Expected Ahead

Opportunities Emerging in Different Sectors

A broad range of sectors are harvesting the fruits of soared demand for products and services amidst social distancing that is emerging as a new way of life amid COVID-19 driven lockdowns.

Tech and telecom space seems to be garnering significant attention, with people increasingly consuming in-home entertainment, shopping online, communicating more often via the internet and adopting work-from-home practices. Consequently, the popularity of value/ growth-driven stocks in the related space, including Telstra Corporation Limited (ASX:TLS), Vocus Group Limited (ASX:VOC), Bigtincan Holdings Limited (ASX:BTH) and WiseTech Global Limited (ASX:WTC) has grown, backed by undervalued prices, robust balance sheets and strategic initiatives.

Moreover, opportunities are popping up in the fintech sector, online retailing and online education segments, backed by a significant shift of consumers towards digital services.

In addition to these sectors, a lot has changed dramatically for the healthcare sector that has been busy leading the world’s vigilant fight against deadly virus. Several prominent healthcare players like Zoono Group Limited (ASX:ZNO) and Mesoblast Limited (ASX:MSB) are vigorously assisting in the global battle against COVID-19.

Although Australia is rapidly regaining some of the losses the country has endured so far, it is too early to say how will things pan out in the medium to long term. Nonetheless, sundry signs still give a hope and there may be opportunities worth looking at.