In signing off 2019 in our last newsletter, we were reasonably confident that although markets may continue to be volatile, we’d have some indication of market trends to help us better manage risk and at the very least, see some trends in Q1 2020. Instead, we had COVID-19 virus which has now infected 1,214,466 across 211 countries and sent the global economy into a tailspin. Some global markets are now well and truly in bear market territory (a fall of greater than 20%) What we know… The global pandemic has taken a severe toll on people and world economies, killing many and even for the healthy, it has radically altered the way we live and threatened livelihoods.
Central banks and governments have taken extreme measures to provide a cushion to the economy and prevent unnecessary loss of lives. We’ve seen an acceleration of quantitative easing programs to pump more liquidity into the market as investors sell off assets and rush to safety in cash. We’ve seen very heavy selloffs in most major markets as investors price in a major disruption to supply-chains due to travel restrictions, government lock downs and border closures.
Fiscal Policy Interventions Most governments around the world have introduced a fiscal policy response ranging from 0.5% to about 17% of GDP. These interventions range from cash payments to individuals and businesses, loans to small businesses and in some countries like Germany, governments taking stakes in businesses to avoid total collapse of business. In Australia, the government is spending about 16.4% of GPD across different facets of the economy to provide a well needed cushion to individuals and businesses for the next 6 months.
Monetary Policy Interventions Central banks around the world have significantly reduced cash rates to try and stimulate their economies. There’re commitments to buy more bonds, in some cases in unlimited amounts, to ensure they continue to create liquidity in credit markets.
In Australia, the Reserve Bank (RBA) has launched a $90 billion funding facility for lenders, with extra money available for those who lend to small businesses. APRA is relaxing capital requirements to allow banks to focus on the crises at hand. Is this the Global Financial Crisis (GFC)? Much as this is not the global financial crisis we faced about 12 years ago, the COVID-19 global pandemic has similarities and also some huge differences in response. During the GFC, governments and central banks acted slowly with fiscal and monetary policy interventions. We now have governments and central banks acting swiftly and uniformly to help combat these crises.
However, central governments in 2008, did not have the difficult task of dealing with a health crisis which has the tendency of sending the economy into a recession. In 2008, we knew the problem and had a solution in many respects. In 2020, we know the problem but we do not have a solution. And the measures being taken now, are only buying us time and not fixing the problem. What does this all mean? Global markets continue to be extremely volatile. Most economies are in some form of a lock down, travel restrictions continue to exist, businesses are struggling, unemployment continues to rise and government debt continues to rise. In the meantime, we’re yet to find a cure or vaccine to help minimise the impacts of the COVID-19 pandemic.
If a vaccine is developed in the coming months, there’s a chance of a sharp rebound in investment markets. However, it may be a while for business activity to normalise and government debt reduced. The impact on the economy may drag on for some time. Having said all that, it is important to understand that every life stage will have different needs during these crises. One size does not fit all and it is important to continually review your strategies to ensure you remain on top of this situation as events unfold. We’re in an unprecedented period and what may have worked 12 years ago, may not work today. It’s more important than ever to continue to discuss these issues with a trusted Financial Adviser.
This report may contain information sourced from research through our research house Lonsec. It may also contain our in-house assessment of the impacts of the COVID-19 pandemic on Australian and global economies. This information is general in nature and does not consider your personal circumstances. Before you implement any changes to your current situation, we recommend you speak to us. Information is current as at 07.04.2020
