Weekly Wrap by Pythagoras Investing: 21 June 2020

Financial markets are paranoid about an acceleration in new coronavirus cases, driven by the concern about a larger and longer global recession than expected.  This concern was sparked by outbreaks in Beijing, Tokyo and the continuation of problems in US.

Therefore, the market recovery is based on a reduction in social distancing practices but not factoring a second wave (however big that may be).  This week the realisation has thrown a spanner in the works for some investors.  We view it as unrealistic not to have coronavirus outbreaks, but overall we still believe that it should be substantially controlled by October 2020.  In the great scheme of things it is not a lot of time to wait, but markets live minute to minute. 

This week the US central bank broadened its asset buying program to corporate credit – effectively sending more money into the US economy.  Although injected into the US, that capital spreads around the world pushing liquidity into assets like shares.  In effect the markets worldwide have been boosted by governments emptying their coffers to save their economies, all at once.  Almost.  It is interesting that China has not yet put out a major rescue package of note.

A few interesting signs this week:

  • Retail spending is up 16% in June which is good to see, but it is based on JobKeeper/Seeker.
  • Home buying, which was weak in April, stabilised in May.
  • Health and fitness spending remained strong.
  • Not surprisingly, travel and education remained weak. 
  • Unemployment rose from 6.2 percent to 7.1 percent – underemployment is the issue. 
  • JobKeeper is being re-assessed by the government – we can’t see how this can be stopped, but we also acknowledge that it is unsustainable for the medium term.
  • The Trump administration is reportedly planning to spend nearly $1 trillion on roads, bridges and 5G mobile broadband.

In Oil: The OPEC decision to keep production cuts in place keeps oil stronger. Good for WPL, STO, BPT and OSH.

In Iron Ore: The long-term urbanisation trend in China and a lack of alternative supply is paying off for Australian iron ore producers.  Until Brazilian competitors export iron ore, the Chinese demand for Australian product is going to remain pretty strong.  Large producers RIO and Fortescue remain in the sweet spot.

Banks: Traditionally banks have been good dividend payers.  We need to see dividends reinstated for them to do very well again.  We are still of the view that banks are bearing a lot more risk than usual, the impact of which is not going to be understood for some time.

Capital raisings: are ongoing.  During the GFC, close to 10% of the total stock market value was raised by companies to shore up balance sheets.  Investment bankers have been busy and we expect them to remain so as raisings continue.  Subscribing to each is a case by case scenario.

WFH: no swear words here.  Work from home.  In the post-coronavirus world perhaps some workers won’t need to live where their job is located. WFH longer term is clearly not an option for everyone. It will be interesting to see if people take advantage of WFH and live regionally, removing themselves from built up areas to gain lifestyle and housing affordability.  Infrastructure will need to be improved in these decentralised areas – leading to further calls for building infrastructure across regional Australia.

The Limits of Stimulus

It is true to say that government stimulus has created the market rise. The bigger questions are what are the limits to such stimulus, and how will we know when these limits are reached? Or is the answer to just keep printing money and worry about it later? 

Afterall, other than Greece, how often does a country go broke?

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