Australia back in business by July

“Australia back in business by July” is the message from the cabinet meeting yesterday. The government clearly don’t want to be seen to be slow getting the economy going again and have developed a few catch phrases like “A sustainable COVID-19 Safe Economy” which means continuing with social distancing and safe hygiene. They expect the economy to reboot in three stages starting in July – good to see measures to avoid a relapse. Stage one will include café’s, restaurants and retail. It's all good for the stock market. These are the predictable headlines you had to get ahead of and the reason we got fully invested again (see this Livewire Article titled “Its Over” from '27 April). There are similar noises in the US with Trump saying “We did everything right, but now it’s time to get back to work”. He has also announced the wind down of the virus task force at the end of the month. New Zealand opportunity – Perhaps we should be buying SYD and AIA – looks like NZ will become the exclusive Australian holiday playground for a few months as we open borders with them and no-one else. If you ran a Waterworld in Christchurch (might be a bit cold) you would be rubbing your hands at the prospect of thousands of Australian kids having their first school holidays this year. Which stocks? Please tell me. Icing the cake this morning is Philip Lowe saying we could see a stronger economic recovery than expected at the RBA Meeting yesterday. “A stronger economic recovery is possible if there is further substantial progress in containing the coronavirus in the near term and there is a faster return to normal economic activity”. Still guarded though – “there is still considerable uncertainty” about the economic outlook. No change in rates obviously - the consensus prediction is that they are on hold until at least the end of next year. The RBA Statement on Monetary Policy out on Friday will include “several economic scenarios” being considered. Central forecasts include:
  • GDP to fall 10% in H1.
  • GDP to fall 6% for the year.
  • Unemployment peaking at 10%.
  • Unemployment still at 7% at the end of next year.
Corporate bond market getting back to normal - The RBA also say they have been able to cut back on corporate bond buying as the financial markets get back to normal – “The bank has scaled back the size and frequency of bond purchases, which to date have totalled around $50 billion” although they are “prepared to scale-up these purchases again and will do whatever is necessary to ensure bond markets remain functional”. They won’t need to. Relapse risk – Philip Lowe also warns of the risk of a relapse and this is going to be the main concern for all markets for the next couple of months – Lowe sums it up like this “If the lifting of restrictions is delayed or the restrictions need to be re-imposed, or household and business confidence remains low, the outcomes would be even more challenging than those in the baseline scenario all”. The outcomes would be more than challenging for the stock market – it would be disastrous. So we’re all on ‘relapse watch’ although it seems low odds; didn’t happen in China and we should be OK, but keep looking over your shoulder. The media will love to beat up a relapse story, even if there isn’t one. Retail Sales numbers today will see a strong March number up 8.2% thanks to buying and a pop in food prices – underlying should be up 2.6%. Sectors that have seen price drops include healthcare (elective surgeries slowed), travel, childcare and entertainment. Sectors that will be slow to restart include Tourism and Education. ADP Employment numbers out in the US tonight – Can you believe this – they reckon if the number of unemployed is below 21m the market will bounce. The times we live in. STRATEGY SUMMARY Daily Chart of the ASX 200 - going a bit sideways:
  • A lot happier about being fully invested – The Friday wobble dented things but we appear to be powering through with two days of solid rises.
  • Good headlines – All the restart headlines both here and in the US are just what we want to hear. As predicted, the politicians are now trying not to cock up the restart by leaving it too late. News in the US of Pharmaceutical stocks bouncing on the development of COVID-19 treatments is good as well.
  • There’s still a relapse risk – Obviously. But looks low odds. Keep an eye out. It would change everything.
  • Oil price back over $30 up 24% in the US and 16.8% in the UK. RD Shell up 6.5%, BP up 6%. I hope you’re all holding some oil price sensitive stocks. This is a long-term low. Don’t be too picky – WPL, STO, ORG, BPT, OSH, WOR.
  • There will still be casualties – Stock selection still important. You don’t want to be buying a Norwegian Cruise Line if it could go bust – NCLH.K they have just raised $675m in senior notes at a 12.25% coupon (!). Some companies will be crippled. Not all will recover. Stay in the normal distribution curve on risk; no need to play at the extremes. We still have a lot of profit warnings/earnings guidance downgrades to come ahead of the results season in August. You can still get blown up on specific stocks - don't go too big on one stock.

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