A global economic recovery remains underway as indicated by The JP Morgan Global Composite PMI which rose 5 points to 52.1 in September.
Generally, readings above 50 points indicate activity expanding across both the manufacturing and services sectors globally. The end of September quarter economic growth numbers confirm the beginning of economic recovery with China growing 2.7% in the September quarter and 11.7% in the June quarter.
A key challenge to economic recovery has been new waves of COVID-19 infections. Europe was among the hardest hit, while cases in the US have not abated. These new infections raise the risks of new restrictions by governments, which will have ongoing negative impacts on all businesses, including both local and international trade. We have begun to see this occur in Europe with curfews introduced across much of France and Italy, in a bid to limit evening gatherings to reduce virus transmission. These increased restrictions point to the heightened risk of another quarter of negative economic growth in Europe.
An Australian recession was officially confirmed with economic activity falling -0.3% in the March quarter and -7% in the June quarter. This prompted the government to respond with the JobKeeper and JobSeeker programs which were designed to subsidise workers’ wages and temporarily boost income support for those unemployed due to the COVID-19 fallout. Further support has been outlined in the October Federal Budget with tax incentives to encourage businesses to spend and subsidies for businesses adding younger staff. However, a second wave of COVID-19 cases in Victoria prompted statewide lockdowns, severely impacting businesses and workers.
Looking ahead, we have seen a recovery in business conditions and confidence via the NAB Monthly Business surveys. Conversely, we note retail sales weakened in late September as households reduced their spending with the tapering of the JobKeeper program from October onwards. Victorian lockdown restrictions are being eased gradually and New South Wales is also relaxing its social distancing measures. Border restrictions between States are lifting. This will be important for economic growth as more businesses re-open to interstate tourists and hire more workers.
The S&P/ASX 200 index fell -1.4% on a price basis during the September quarter with Information Technology the top performer (up 12.3%) followed by Consumer Discretionary (up 7.7%) and Property (up 6.7%). Gradual reduction of lockdown measures across most of Australia and exceeding expectations in reporting season were notable drivers for the Consumer Discretionary and Property sectors. In particular, home improvement companies such as Nick Scali and Beacon Lighting saw strong growth.
Most sectors had negative returns, with Energy (-15.2%), Utilities (-9.5%) and Financials (-6.9%). The Utilities sector fell due to lower electricity prices and the rise of alternative energy sources. Financials suffered the speculation of another RBA rate cut by 10bps and lockdowns in Victoria. This acted as a drag on economic growth. In addition, it poses challenges to the health of bank mortgages as the lockdowns force business shutdowns impairing worker and employee incomes, making it harder to keep up with mortgage repayments and other debts.
Fixed income and currencies
Bond prices rose, driving bond yields lower both here and overseas during the quarter. Rising COVID-19 cases, particularly in Europe, became a concern for markets late in the quarter prompting a sell-off in shares and a move to bonds.
In Australia, the RBA left interest rates on hold. Speculation remains of a further cut of 0.15% to support economic activity (this occurred in early November). This will likely be followed by additional bond purchases to reduce bond yields. These actions would lower the cost of borrowing for both the Federal and State governments, an important source of support as both government bodies contribute substantially to the economies. To the extent that banks pass on a rate cut it also helps borrowers increase their income by reducing their borrowing costs.
For specific financial planning advice, speak with OBT’s Financial Planning team on 07 5462 2277.