Captains Log: We are now approaching seven months of being in these unprecedented Covid-19 of times. The ‘galaxy’ and the way we used to operate is behind us. We are ‘boldly going where no one has gone before’, nor has gone at this such fast pace of change! Maybe it is contemporary style of a ‘new world civilisation’! I am borrowing this theme from the old television series, Star Trek, which many of us grew up with. How simple and imaginative life did seem then!
Covid-19 and the dramatic economic and social consequences of what has happened in Australia and around the rest of the globe, has changed the way people and businesses work, operate, communicate, and travel. Social and business interactions have changed, and with a sense of fragility. Yet, we are adapting to this change, albeit much by necessity and even via dictatorial means (i.e. certain State Premiers lead that dictatorial shortlist)!
Please explain to me again, why do we need state governments in Australia, particularly when Federal politicians are elected from their respective state precincts to represent their constituents in the Federal government? Maybe this state power made sense around Federation in 1901, but in these modern times and with massive advancements in technology should remove these so-called border barriers that exist. This all adds volume to this needed question, along with seeing the economic and social devastation that has occurred to date with how certain state governments have farcically handled this Covid-19 dilemma. Economic lockdowns and border closures are just going too far and for too long. These lockdowns are becoming job killers and business destroyers.
It has been a painful period for all. We all wonder when – and it is ‘when’, not if – this Covid-19 impact of restrictions, barriers and shutdowns will diminish, and when people around the world can properly re-focus on the future again, which we all must do. People do need to get on with their lives. In saying this, there is no doubt that adaptation to change is happening. Humans do adapt, businesses do adapt. We are also closer to a vaccine! There are and will be hiccups along the way but, I do think that even slow progress is progress in these times where nervousness and uncertainty still simmer.
In many countries, including in Australia and the US, listed companies release their bi-annual corporate results along with their outlook for the ensuing six months or so. February and August are the big months for these announcements. Heading into February this year, the overall profit results and outlooks beat expectations. The future was still looking good for businesses and economies overall. Then, Covid-19 hit; and enforced economic shutdown and social separation policies by governments followed as a consequence. So, the just now completed August company reporting season outcomes were critical in their potential impact for economies ahead.
Fortunately, the general consensus amongst economists and fund managers, etc., is that this reporting season exceeded expectations, particularly with US businesses. This is important in that, although bad news and very poor data was anticipated, the extent of it was not seen in the numbers released and guidance announcements. This reporting season can be seen as an economic positive overall for the markets with some steady results and some renewed hope for the latter part of this year and for 2021. Markets are forward looking.
Certain sectors have been great beneficiaries of Covid-19 situation, such as technology stocks, health services, online businesses, supermarkets, delivery and courier businesses, e-commerce, consumer discretionary stocks. Have you tried buying whitegoods or computer equipment quickly in recent months? Not the case! The global supply chains are still not humming but it also implies there is pent up demand and plenty of cash around to spend once more normality returns i.e. getting the economy back on the road back to where it was in pre-Covid-19 days.
On the flip side, there are areas of business not doing well at all. As we know, areas such as international travel, hospitality, casinos, shopping centres, have all been walloped by the Covid-19 impact.
The stock markets have been taking on board the ‘on balance encouraging news’ and have also shown some advancement in recent months. Continued government cash injections and stimulus measures also are helping this progress. Furthermore, with continued growing global demand for resources, especially in iron ore demand, Australia is seeing a succession of trade surpluses now, although global trade still is down because of Covid-19 impacts.
The US market very recently hit higher levels than pre-Covid-19. This was simply because of technology stocks having a frenzy of massive demand. The top five stocks on the US are now all technology stocks. It has become a formidable sector. Many technology stocks have been up over 100% in the past six months or so. Yes, there is good justification for heightened demand in good technology companies in recent months, however, the sector, as a whole, is in bubble space one would think. Conversely, with money pouring into the tech sector, many traditional, non-tech, value-oriented stocks have been ignored. A rotation or correction to some extent is well due.
With Australia now being in an ‘enforced’ recession because of government intervention in forcing the economy into a ‘hibernation phase’, the management of the speed back of the recovery will be important. Once again, state governments need to forget politics, Covid-19 numbers obsession, and just get the economy back on track. Probably the biggest issue ahead is where national unemployment will be at once Job Seeker and Job Keeper payouts are partially reduced at the end of this month. We will need to accept that there will be higher unemployment, and particularly some more permanent unemployment, especially in the corporate world.
Domestically, the Covid-19 impact also has forced the deferment of this year’s Federal Budget until early October now. Like the recent corporate reporting season has been of notable importance in where sentiment is likely heading, this upcoming Federal Budget will be quite crucial in what it delivers regarding further stimulus continuity via investment initiatives and incentives, and, of course, in anticipated tax cuts. Momentum tailwinds in progress and growth must be maintained and supported in this budget.
In summary, in Australia, we are all still living in the Covid-19 induced environment. The rising optimism that we had pretty much beaten the virus spread, and normality in life was back, was frustratingly dampened by the Victorian virus outbreak in June, and with the domestic border restrictions back on. Hopefully, with the decline again now in Covid-19 cases, and good stimulatory outcomes in next month’s Federal Budget, we can see the brighter light again for the longer term. The underlying built up demand is there; people want to buy, people want to travel, businesses want to rebuild and to grow; normality (albeit a now evolved version) is craved by all. We must always look at the long term, particularly when investing.
To close on the Star Trek theme, we also give out the call (to the PM): “Beam us up, Scotty”!
As always, should you have any queries or wish to have a discussion, please do not hesitate to contact us.