May, 15, 2020

Investment markets continue to fluctuate on the news cycle.  Better than expected unemployment numbers (still -14.7%) in the US and lots of rhetoric about lockdown easing’s saw a small rally last week and then this week markets lost most of that ground on the basis of sobering growth numbers on the global front.

My concern with the numbers being thrown about is that many commentators seem to go looking for the worst case continually and then extrapolating on that.

  • An example is a forecast this week of a global growth rate for the 2020 calendar year of -5% and US unemployment to peak at ‘a depression’ like -25%. US company earnings would then be down by about 20% for the year.
    • This was coming from the US Federal Reserve but the commentator wanted to draw the comparison to the 2007/8 global financial crisis and therefore criticised the earning forecast as he believed it should down by -37%, as unemployment numbers have dropped more quickly?

Now, arguably US and many global equities were overvalued at the start of the year and hence our many conversations about Icebergs over the last 18months.  As we have said, you can’t see the future but you can prepare for it.

We ran into the Pandemic and within six – eight weeks, world economies were shut down. You can certainly justify miserable forecasts for the June quarter.  Taking these numbers and then using them as the growth profile for the 20_21 and 21_22 financial years is where I would have some questions.

  • The companies that were creating the earnings are still there – albeit ‘under the Dooner’. We don’t have a Lehman’s collapse or securitised housing crisis seeing homeowners sending their keys back to banks in the mail.  World debt markets have not collapsed and company earnings versus share prices, while inflated, were not at the ridiculous levels of 2007.
  • While unemployment rates during this period are expected to be high, it is during a much abbreviated period – not the three years of the GFC, and then the three year recovery after that. Despite this, there is a lot of media predicting businesses will not re-employ their staff and then predicting Armageddon when Job Keeper runs out.

Yesterday the federal government released our unemployment figures which were surprisingly low (6.2%) but immediately media commentators tore the numbers apart to make them look worse.  I can understand the math but it is already old news.  No surprises here, of course a lot of people are unemployed, their business were closed.  Spoiler alert, the June GDP rate which will be released in July/August will be a shocker.  We know this, it is May.

By nature, I am an optimist but I do temper that with as much reading as I can and, like you, have the backdrop of life experience to fall back on, yes it is ‘unprecedented’, but is it really?  Most of us have lost a job or been through a change of life. You slow spending – essential only – until you have a job, build up the reserves once you get the job and then return to a ‘normal’ pattern.

Most – and I fully accept not all- of our Covid impacted employers and employees will return to work as the restrictions loosen. They will have been out of work for 8-12 weeks and while having done it extremely tough, will have had access to Job Seeker or Job Keeper payments. Very tough for non-residents who cannot access Job Seeker but they will still get back to work as soon as they can while relying on savings – anyone who lives and works overseas accepts this.

  • Some industries will continue to suffer – international travel and the associated services being the obvious one and events such as sport and music.
  • Some industries will restart at 100 miles an hour – think elective surgeries and associated medical and pharmaceutical.
  • Hospitality will be constrained and larger restaurants will wait until further easing’s before opening for in-house dining.
  • Domestic tourism will have the benefit of the $50 billion that Australians usually spend on overseas travel – especially in the longer June/July school holidays.

Total employment in Australia level at 29th February 2020 was 13.015 million.  That is what we need to get back to.

The public sector employs 2.046 million Australians (as at 30th June 2019).  242,100 are Commonwealth employees, 1.6 million are state employees and 194,000 are in local government.  Wages are being largely un-impacted by Covid19.

Our biggest employers by industry are Health and Social Assistance, Retail Trade, Construction Professional Services and Education and Training – over 6.2 million employees at June 2019. Retail trade has been shut down and some education and training (though online has expanded).  Health, Construction and professional services are in reasonable shape.  Accountants, as an example, have never been busier.

Small business (less than 20 employees) employs 44% of all Australians and they have been the ones really hurt and they will be the ones who reduce those unemployment numbers as they open.

Covid-19 is a health issue, not a structural issue, and while it has exposed companies with thin profit margins, and yes, we will take a while to get back to cruising speed, the business and demands that were there in January 2020 will still be there when we find any new normal.

Enjoy your new freedoms!