Weekly Wrap by Pythagoras Investing : Stage 4 Restrictions

The Australian Dollar

From the middle of the GFC the A$:USD appreciated from 65c to $1.00+.  Similarly, from the end of March 2020 our currency has surged from a low of 58c to 72c.  This is a mammoth move.  Exporters must cope with these currency moves as foreign buyers pay more Australian dollars for our goods. 


Remarkably, China’s stock market has exceeded pre-Covid highs already. China’s economic strength out of the crisis is by far and away the strongest of any major economy. This strength is helping to bolster commodity prices – including the all important Australian export; iron ore. Our linkage to China is fortunate to say the least.

Spending boom?

Lock downs and economic stimulus are fueling spending on alcohol and tobacco, online gambling and home office requirements.  Superannuation drawn-down coupled with a household cash flow boost (thanks to Jobkeeper/seeker) has resulted in a mini spending boom.  The economy can’t rely on this going forward and we would see this as a temporary factor.

What will Victoria’s Stage 4 restrictions mean? 

Almost everything is closed but for the  butcher, baker and the candlestick maker.  Industries deemed important will be scaled back to ‘pilot light’ position. The effects are broad ranging but near term these are important to understand:

  • Retail spend – Victoria’s share of retail spend is 25% of the total Australian retail spend.  These restrictions mean that 12% of retail spend is at risk (ie 6/52 weeks).  Non-discretionary spending (eg supermarkets) are unchanged but encumbered with more expense and potential stock outages. Discretionary spending will be hard hit for the coming 6 weeks.  The exceptions are geared to larger groups with “click and collect” ability.
  • Construction represents 13% of the Victorian GDP and 15% of employment. To date the construction sector has fared reasonably well.  But restrictions have changed all of that for the coming 6 weeks. Unions aregoing to combine to fight the government restrictions.
  • Banks are under more bad debt pressure.  Banks are believed to need to raise additional capital on market to sure up their own balance sheets.  This leads to selling pressure on prices of bank shares.
  • Petrol use in Victoria will be reduced over the coming 6 weeks creating less upward pressure on petrol (therefore oil) – but it is more marginal.
  • Unemployment was forecast by the Federal Government to be 9.25% by Christmas. This is now optimistic.
  • Government debt is set to increase with more required to support Victorians.

Coronavirus moves with people

The Victorian government is seeking to stop the movement of the virus by stopping the movement of people. The consequence is there are now 2 million fewer people moving and interacting as a result of Stage 4. There are 500,000 people working from home, 250,000 already stood down AND 250,000 more stood down because of these changes.  In addition, there are a million students, teachers and education sector employees working from home.  Clearly face masks have made little impact so far.  The key question is “will the extra 1.25m people not moving around make all the difference?”. 

Of course Victorian’s need to remember that getting out from the stage 4 restrictions doesn’t guarantee freedom – just back to stage 3.

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