August 2020

The global economy has been severely affected this year by economic restrictions put in place by governments around the world to hold back the spread of the Covid-19 coronavirus pandemic, which originated in China. While the International Monetary Fund (IMF) has termed these restrictions the ‘Great Lockdown’, many countries are beginning to open up their economies again, especially now that testing regimes have been expanded and more has been learned about this disease. In particular, this coronavirus appears to affect elderly people much more severely than those who are younger and so, in many cases, schools are re-opening and younger people are beginning to re-engage in activities. The economic consequences of this lockdown have been extreme but it now appears likely that recovery could be swift over coming months, regardless of whether an effective vaccine becomes available. Of course, if a reliable vaccine does emerge, then recovery could be even more rapid.

In its latest report (June), the IMF is forecasting that the global economy could contract by 4.9% this year, with the advanced economies as a group forecast to contract by 8%. The developing world is forecast to contract by a more moderate 3% this year, with China actually forecast to grow by 1%. Next year though could see a strong economic rebound across the world, with global growth forecast to be 5.4% (5% in the developed economies and 6% in the developing world). However, the ultimate financial costs of the measures taken to overcome this pandemic are likely to be huge and could become a burden on many economies for years, particularly as and when interest rates begin to rise above what are currently historically unprecedented lows.

Most share markets followed last year’s ‘bull run’ with a heavy setback in March due to the spread of the coronavirus. Since then, however, share markets have been trending upwards. From 1 January this year to 28 August, major share market movements have included the broad US market (S&P500) up 9%, the technology-focused US Nasdaq index up an impressive 30% and China up 12%; while market declines have included Germany 2%, Japan 3%, India 4%, Australia 9% and the UK 21%. Most major share markets could potentially rise from current levels as and when stronger evidence of recovery emerges.

Major global government bond markets saw yields reach record lows in March. Yields then began to rise before central banks intervened to hold rates down in order to lift economic activity. The US 10-year Treasury bond yield fell to an historic low of 0.54% on 9 March and was still only 0.72% on 28 August. The Australian 10-year bond yield though was 0.57% on 8 March but was 1.02% by 27 August. Most bond markets continue to look expensive.

In Australia, while the virus has been relatively well contained, the cost has also been enormous, with both Commonwealth and State budget deficits blowing out by huge margins and national debt forecast to grow significantly (with net debt forecast to reach 36% of GDP by the end of the 2020-21 financial year). While the economy is forecast to recover in 2021, massive monetary and fiscal support will have to remain in place for an extended period. Monetary support currently includes historically low official interest rates (now only 0.25%) and the first ever use of ‘quantitative easing’ in this country; while fiscal support measures include government payments for unemployment relief, as well as grants and loans to businesses and individuals.

Fiducian’s diversified funds are currently above benchmark for international shares, slightly overweight domestic shares, around benchmark for listed property and well underweight fixed interest sectors, while cash weightings remain well above benchmark.


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