June 2020

The global economy currently remains in deep recession. This recession has been caused by actions taken by governments almost everywhere to suppress the spread of the Covid-19 coronavirus, which originated in Wuhan, China, last December. The International Monetary Fund (IMF) has termed these governmental actions the ‘Great Lockdown’ and in early June significantly revised down its forecasts for global growth for this year. The IMF is now forecasting that the global economy could contract by 4.9% this year, with the advanced economies as a group forecast to contract by a hefty 8%. This compares with a forecast decline of only 3% for the developing world as a whole and actual growth this year of 1% for China. Next year though is expected to see an economic rebound, with global growth forecast to be 5.4% (5% in the developed economies and 6% in the developing world). While much will depend on whether the spread of the virus can be limited, it now appears that economies are likely to steadily re-open for business regardless of the progress of the pandemic. For one thing, testing regimes are increasingly widely available and these potentially could enable governments to contain the virus within limited areas and allow many businesses to re-open.

As the OECD noted in its report of 10 June, ‘the pandemic has started to recede in many countries, and activity has begun to pick up’. Some regions though are going to be affected more severely than others. Europe, for example, appears likely to experience particularly severe economic shocks. The Eurozone is forecast to contract by over 10% this year before recovering by 6% next year, with France, Italy and Spain each expected to contract by over 12% this year, while even Germany is forecast to contract by around 8% before rebounding by 5% in 2021 and the UK is forecast to contract by 10% before lifting by 6% next year.

In Australia, the Governor of the Reserve Bank, Philip Lowe, noted on 2 June that ‘it is possible that the depth of the downturn will be less than earlier expected’. Certainly, the virus has been more effectively contained than in many other countries and this has increased the scope for a return to more ‘normal’ levels of economic activity. As well as monetary support provided by the RBA with historically low official interest rates (now only 0.25%) and the first ever use of ‘quantitative easing’ in this country, governments at all levels have also implemented massive fiscal support measures.

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 26 June, major share market declines included the broad US market (S&P500) down 7%, the UK 18%, Germany 9%, Japan 5%, China 2% and India 15%, while the Australian market declined by 12% and the technology-focused US Nasdaq index actually rose 9%. Most of the major share markets could potentially rise further over coming months as and when the spread of the coronavirus is wound back.

Major global government bond markets saw yields reach record lows in March before they began to rise. However, massive central bank intervention has since kept yields low. The US 10-year Treasury bond yield fell to an historic low of 0.54% on 9 March and was still only 0.64% on 26 June. Similarly, the Australian 10-year bond yield fell to an historic low of 0.57% on 8 March but was still only 0.86% by 26 June. Most bond markets continue to look expensive.

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

 

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