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Why are investors ignoring the economy?
Despite weak economic data led by the COVID-19 shutdown, the sharemarket has rallied with investors being bullish on Australian businesses over the medium to long term, a fund manager has indicated.
Why are investors ignoring the economy?
Despite weak economic data led by the COVID-19 shutdown, the sharemarket has rallied with investors being bullish on Australian businesses over the medium to long term, a fund manager has indicated.
In a video update, Fidelity International’s cross-asset specialist Anthony Doyle has discussed why investors are being bullish when the economic data suggests investors might well be bearish.
Mr Doyle stated, “During February and March, Australian had a peak to trough of around 37 per cent, but since then we have had an 18 per cent appreciation following the US Federal Reserve announcement that it was expanding its quantitative easing program.”
The economic backdrop
The rally, which started 23 March, coincided with some of weakest economic data since the Great Depression.
One of the key measures, the unemployment rate, has increased but not to the level expected by most economists, as government intervention of the JobKeeper policy helps support the Australian workforce.
Seasonally adjusted employment fell by 594,300 people between March and April, according to the Australian Bureau of Statistics. Large changes were seen across all labour market indicators in April.
Unemployment increased by 104,500 people to 823,300, and the unemployment rate increased by 1 percentage point from 5.2 per cent to 6.2 per cent.
The sobering job numbers reflect the economy as a whole, with the Reserve Bank of Australia updating its own forecast to show a retraction in GDP, household consumption and dwelling investment for the June quarter.
The RBA also expect deflation in the current quarter and low growth in the next three quarters before hitting its targets of inflation between 2 and 3 per cent in June 2021.
Are investors ignoring economic data?
Mr Doyle observed that investors remain bullish on the Australian market despite leading economic indicators that would suggest otherwise.
“A lot of [the sharemarket growth] is really the result of how well the Australian population have done in order to contain the coronavirus,” he said.
According to the cross-asset specialist, “We are likely to be one of the first developed market economies to lead out of this current corona crisis we find ourselves in.”
He considered Australia also to be in a relatively strong place due to its neighbours also passing the worst of COVID-19, which could act as a tailwind for the Australian economy.
“We will open up before a lot of the other developed market economies and are also quite geared into the Asian economic growth story as well.”
“So, more positive news on coronavirus, more positive news on the economic outlook in a relative sense and our federal stimulus package has been one of the largest seen internationally as well,” Mr Doyle stated.
Combined, this has had the impact of improving market sentiment, and equity markets are reflecting these “improving risk sentiments around risk assets”.
Despite the positivity, the specialist has warned investors that the market is not out of the woods yet, with weaker company results likely to be on display in the coming months.
“Now, whether this remains to be the case in an avalanche of earning downgrades and dividend cuts that we may experience over the next six to nine months is obviously the big question,” Mr Doyle concluded.
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