Global equity markets fell sharply in March when it became clear that the novel coronavirus (COVID-19) would not be contained without significant economic impact. The value of the Australian Dollar decreased against all major currencies, somewhat dampening the impact on overseas investments when measured in Australian dollar terms. Global investment grade credit spreads widened significantly over the month (i.e. the market’s perceived riskiness of lending to high quality companies increased).
Stimulus packages of unprecedented scale (outside of war time) have been passed by all major economic regions. Some packages are in excess of 20% of Gross Domestic Product (GDP), such as Germany’s, whilst Australia’s stimulus is currently around 10% of GDP, with potentially more commitments to come. Central Banks quickly cut short term interest rates and announced quantitative easing (QE) along with other measures used during the Global Financial Crisis. Quantitative Easing refers to the practice of central banks creating new money supply by buying bonds issued by the government. The US Federal Reserve cut its target range for interest rates by 1.5% in two stages during March and it now sits at 0% – 0.25%. The Reserve Bank of Australia (RBA) cut rates by 0.5% to 0.25% on 20 March and began QE for the first time in its history. The Governor of the RBA, Philip Lowe, stated “we are prepared to do whatever is necessary”. Governments have enacted multiple measures of fiscal stimulus, including direct financial assistance to citizens including extensive loan guarantees. The US stimulus bill was debated heavily within congress but has now been passed with over US$2 trillion of aid being provided. The Australian Government has announced a $160 billion package to subsidise the wages of workers. Further stimulus packages are being prepared by governments, with Australia looking to implement its 4th round of stimulus.
The price of oil dropped significantly over the month of March with both demand and supply side factors contributing. Initially the demand for oil dropped due to the economic effects of COVID-19. OPEC ministers agreed to cut oil supply by 1.5 million barrels a day in response to the initial demand shock, contingent on Russian support. Shortly after Russia refused to comply with this target, Saudi Arabia announced it would increase oil supply by over 10 million barrels per day, effectively abandoning existing production limits. Oil prices fell substantially and briefly dipped below US$20 per barrel; a level not seen since February 2002.
Brexit transition negotiations took a backseat to the unfolding pandemic crisis. Although neither the United Kingdom (UK) nor the European Union (EU) have agreed to push back the transition deadline yet, the consensus view is that the deadline will be moved. Currently the transition period is set to end on 31 December 2020. Boris Johnson, the Prime Minister of the UK, along with his health secretary and his chief medical adviser have tested positive for COVID-19. Johnson has self-isolated and continues to conduct business using video conferencing technology.
On the 11th of March COVID-19 was declared a global pandemic by Tedros Adhanom, the President of the World Health Organisation (WHO). As of 31 March 2020, there have been over 850,000 people confirmed as having been infected with the virus from over 200 countries, leading to over 42,000 deaths. Cases in China have reportedly slowed, and the current epicenter of the virus is the United States and in particular New York. Italy and Spain have also suffered on a large scale, rapidly overtaking China in casualties as their healthcare systems became overwhelmed.
There continues to be significant uncertainty around the incubation timeframe and mortality rate associated with COVID-19. A significant research article was published on the 16th of March by Imperial College London, which both the US and UK governments have cited, paint a bleak outlook for containing the virus in the near term: in all scenarios the number of intensive care beds is exhausted many times over in both the US and the UK except in the scenario of full lockdown and movement restrictions. Since the report some governments have acted swiftly to increase ventilator production and attain bulk orders of personal protective equipment for medical staff in an effort to treat and suppress transmission of the virus.
As at 2 April, there were almost 5,000 Australian cases, and 20 deaths from the virus. The Commonwealth and State Governments have taken extraordinary efforts to contain the spread. Australia’s borders remain closed, with only Australian citizens, residents and immediate family members being allowed into the country. All travelers are now being isolated in dedicated quarantine hotels for 14 days from the date of return. The Australian Government has laid out guidance for limiting gatherings and determining non-critical services, however, the individual states and territories are able to choose how to enforce these policies. Some states have closed their borders and the Victorian police chief confirmed individuals could face fines up to $1,652 for gathering in groups.
All major foreign equity markets posted deeply negative returns in March. Developed markets (excluding Australia) returned -13.4% on a local currency basis (and -8.3% in Australian dollar terms), performing similarly to emerging markets which returned -13.0% in local currency terms. The worst international performer was Europe’s STOXX 50 Index which returned -16.2% for the month, having to contend with major virus hotspots centered in both Italy and Spain and without the coordinated fiscal firepower of other major developed countries due to the nature of the Euro zone.
The Australian stock market generated a return of -20.7% during March, with all 11 sectors contributing negatively. Energy (for the second month in a row) and Real Estate were the worst performing sectors returning -38.0% and -35.8% respectively as consumer demand plummeted. The best performing sector was Consumer Staples which returned -4.4%, closely followed by Healthcare and Utilities.
From a developed market sectoral perspective, results were qualitatively similar to the Australian stock market, with all sectors producing a negative return. Health Care and Consumer Staples were the best performing sectors, returning -3.4% and -4.4% respectively. Energy was the worst performing sector for the third consecutive month, declining 28.3%, and Financials was the second worst performing sector, returning -21.5%.
The Australian government bond yield curve steepened somewhat over March as two-year and ten-year yields decreased by 0.3% and 0.06% respectively amidst risk-off moves in markets and as Central Banks slashed rates to offset some of the virus-driven slowdown. Decreasing bond yields are positive for short term bond investment returns. Volatility in ten-year Australian government yields was high, with yields ranging from a low of 0.61% to a high of 1.5% during March.
Major global government bond yields saw a mixed outcome with the United States, China and United Kingdom seeing yields fall, whilst Japanese and European yields (which started the month at negative levels) rose in March. The United States government bond yields fell the furthest, reducing by 0.67% and 0.48% over two-year and ten-year terms as the Federal Reserve cut interest rates by 1.5%.
The Australian dollar weakened against all major currencies over the month due to risk off sentiment following the spread of COVID-19. The AUD decreased by 6.3%, 6.2% and 5.9% against the Japanese Yen, Swiss Franc and United States Dollar respectively. The Australian Dollar finished the month at 0.6131 US Dollars, down 3.8 US cents over the month, reaching a low of 55.10 US cents mid-month.
The price of WTI and Brent crude oil fell sharply by almost 55% during March, driven by declining forecasts for global demand and substantially increased supply. Industrial metal prices decreased 10.4% on average, with iron ore being the standout performer increasing 2.3%. In precious metals, gold remained broadly neutral and silver saw a decline of 16.1% for the month.
Performance of key markets:
|Asset class||Index||Month (% change)||FYTD (% change)||1 year (% change)|
|Australian Shares||S&P/ASX 200 Acc. Index||-20.7%||-20.7%||-14.4%|
|International Shares||MSCI World Ex Aust Unhedged A$||-8.3%||-0.7%||4.4%|
|International Shares||MSCI World Ex Aust Hedged A$||-13.4%||-14.0%||-11.1%|
|US Shares||S&P 500 Index||-12.4%||-10.8%||-7.0%|
|UK Shares||FTSE 100 Index||-13.4%||-21.0%||-18.4%|
|Japanese Shares||Nikkei 225 Index||-9.7%||-9.3%||-8.8%|
|Australian Listed Property||S&P/ASX 200 A-REIT Index||-35.1%||-34.4%||-31.7%|
|Australian Fixed Interest||Bloomberg AusBond Composite Index||-0.2%||3.6%||6.8%|
|Australian Cash||Bloomberg AusBond Bank Bill Index||0.1%||0.8%||1.2%|
Returns are for periods to 31 March 2020. Past performance is not an indication of future performance.