Investment update for March 2020

World governments attempt to curb economic impacts of pandemic

Global equity markets continued to fall sharply as the COVID-19 outbreak evolved into a global pandemic. While the outbreak decelerated in China, the number of cases in other countries approached 900,000 by the end of March. To counteract the contagion, governments across the globe have proceeded with the implementation of stricter quarantine measures on travel, social distancing and closure of educational institutions and non-essential businesses. A global recession this year now seems likely, with debate now focusing on the depth and duration rather than if it will occur.

Economic activity in China showed some signs of improvement in March, with Purchasing Managers’ Index (PMI) data rebounding from a record low. Retail data show sales were down 20% in February, and despite signs of an increase in activity over March, they remain below typical levels. Authorities eased credit conditions in an attempt to avoid large increases of unemployment and nonperforming loans that would subsequently impact heavily on economic conditions. China’s coal consumption remains 20% below the average for this time of year. The key area to watch in coming months will be whether or not a new wave of infections occur as quarantine measures are relaxed once infection rates slow.

Globally, aggressive monetary and fiscal policies have continued throughout March as governments attempt to curb the negative impacts of COVID-19. This included the Federal Reserve cutting policy rates to close to zero, the Reserve Bank of Australia indicating that the cash rate would stay at a very low level for a prolonged period, and the ECB announcing its intention to introduce a debt-buying program.

Domestically, the Australian Government announced broader quarantine measures including state border closures and tighter travel restrictions. As a result, Australian equities continued to follow the trend of the global equity market, and produced negative returns over the month. The RBA indicated it was developing a complementary program of support for non-bank financial institutions, small lenders, and the securitisation market which would be implemented by the Australian Office of Financial Management (AOFM). The RBA advised that it was not possible to provide updated forecasts for the economy given the high uncertainty of COVID-19, but Australia would be likely to experience a material contraction in economic activity across the March and June quarters and potentially longer.

Crude oil and commodity prices were the worst performers over the month. The oil price has fallen more than 60 percent since 20 January. This continues to impact the Australian dollar, which depreciated further against major currencies over the month.

US economic conditions fell sharply as the number of COVID-19 cases exceeded any other country. A stimulus package equating to 10% GDP was announced over the month which in turn increases jobless benefits for the coming months. Jobless claims exceeded 6 million, a historical high. The other key development in the US was the Democratic Party presidential primaries, with Bernie Sanders suspending his campaign and bowing out to Joe Biden. In Europe, France, Spain and Germany joined the Italians in enforcing nation-wide quarantine restrictions and expansive fiscal support.

Composite PMI for the Euro area dropped sharply in March, and has now contracted for 14 consecutive months. Japan confirmed that the summer Olympics would be postponed to 2021 and announced school closures in an effort to contain its domestic COVID-19 outbreak. Bond markets delivered fairly neutral returns in March, impacted by ongoing easing monetary policy and continued uncertainty about the severity and duration of the coronavirus outbreak. Listed property and infrastructure followed the broader equity markets in March and fell sharply over the month.

Please view our full investment commentary brought to you by our advisers – Frontier – for a more in depth analysis of market conditions this month. The monthly commentary can also be viewed on YouTube.

Read our monthly market snapshot.

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