First recession in 30 years – when will we recover and how?
The Week that was: First recession in 30 years – when will we recover and how?
• Worst economic conditions since the great depression
• Are there any reasons for optimism?
• How different countries are responding
• The silver lining for ethical funds
Worst economic conditions since the great depression
An update from the International Monetary Fund (IMF) last week predicted the worst economic conditions for Australia since the Great Depression in the 1930s - what does this mean for an economic recovery? Positively, the IMF forecasted the Australian economy could recover faster than the United States, United Kingdom, Canada, Japan, France and Germany.¹
This leads us to question: will this recovery be V, U or W shaped? At this time it’s too early to tell – we can, however, start hypothesising these potential recovery directions and how to manage these in our portfolio.
U Ethical’s Chief Investment Officer James Cook explains:
“With rapidly rising global unemployment numbers, we believe it is fair to assume the global economy is headed into a deep recession. Corporates have been forced to halt business, while banks have been asked to defer mortgage repayments adding to the high levels of uncertainty.
“In Australia, authorities have been swift to respond with unprecedented monetary and fiscal support, however, such measures will have a finite span. Most measures have been designed with a six-month window in which time it is hoped the stimulus generates sufficient momentum to sustain a permanent economic growth and a resumption of a normal economy.
“In this environment a high level of uncertainty appears warranted. This will result in continued volatility across financial markets until clearer trends emerge predicated by how quickly countries can rein in control of COVID-19.”
Are there any reasons for optimism?
Despite the ongoing turmoil across the world, there were some positive signs last week as US stock markets staged their biggest rally since 1974 while the Dow Jones Index posted its best two week run since 1938.
On April 14, the S&P 500 was about 30per cent above its March 23 low and only 18 per cent below its record high of mid-February. Which begs the question: are we technically in a bull or a bear market?
While a bear market is defined as a drop in excess of 20%, a bull market is usually defined by a rally of the same extent. In a short space of time we have technically witnessed the end of a record breaking bull market run, replaced with alternating bear and bull markets. This market volatility highlights the high degree of uncertainty surrounding financial outlook for the global economy.
How different countries are responding
In Europe, France and the UK extend their lockdown while Spain and Italy have started to relax some restrictions.
While across the Atlantic, the numbers in the US continue to be of concern as is the politicisation of the crisis; President Trump believes he has ‘ultimate and total authority’ to reopen the economy, which was later disputed by legal professionals and US Constitution experts. Furthermore, the US has temporarily halted funding to the WHO due to their perceived favouring of China in their handling of the outbreak.
The silver lining for ethical funds
Will the COVID-19 pandemic be a boon for ethical funds? Performance of ethical funds compared to benchmarks have been positive while the flood of money to ethical funds suggests investors are seeing the light too. ³ Sustainable funds are evidently weathering the volatility and in fact transcending the crisis, evident in the US’ record quarter for flows in sustainable funds. ⁴
Is the coronavirus realigning investors’ priorities toward a new normal of sustainability?
Chief executive officer of Entelligent, Thomas H. Stoner said, “Amid the wrenching market falls of recent days […] we’ve seen that the renewable energy sector and other companies less reliant on fossil fuels have been relatively favoured by investors.” ⁵
“This is a moment when the world needs to revive international cooperation, both to stamp out the coronavirus and to work on the concerted policy changes that are needed to combat climate change and manage the risks of transition to a new kind of economy,” he said.
Stay safe and well,
David Brennan, Director - Distribution
¹ The Hon Josh Frydenberg MP, IMF expects Australia's economic growth to rebound, published 15 April 2020, available at: https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/imf-expects-australias-economic-growth-rebound, Accessed 15 April ²Commonwealth Bank of Australia, Global Economic & Markets Research report “CBA Card Spend – week ending 3 April 2020”, published 6 April 2020, author Kristina Clifton. Full Global Economic & Markets Research disclaimers can be found at www.commbankresearch.com.au. ³ Jon Hale, Ph.D., CFA, ‘Sustainable Funds Weather the First Quarter Better Than Conventional Funds,’ Morningstar, published 3 April 2020, available at: https://www.morningstar.com/articles/976361/sustainable-funds-weather-the-first-quarter-better-than-conventional-funds, accessed 17 April 2020. ⁴ Jon Hale, Ph.D., CF, ‘Despite the Downturn, U.S. Sustainable Funds Notch a Record Quarter for Flows,’ Morningstar, available at: https://www.morningstar.com/articles/977328/despite-the-downturn-us-sustainable-funds-notch-a-record-quarter-for-flows, published 9 April 2020, accessed: 15 April 2020. ⁵ Thomas H. Stoner Jr., ‘Opinion: Coronavirus will realign investors’ priorities toward a new normal of sustainability,’ Market Watch, published 20 March, available at: https://www.marketwatch.com/story/coronavirus-will-realign-investors-priorities-toward-a-new-normal-of-sustainability-2020-03-20, accessed 15 April.
The market commentary reflects U Ethical’s position at the time of publication and is subject to change. U Ethical reserves the right to make any adjustments to the investment strategy or outlook for all products at any time to reflect major disruptions or changes in the financial markets, as allowed by the relevant governing documents, Product Disclosure Statement, Information Memorandum, or Offer Documents. Past performance is not indicative of future performance. All investments carry risks. There can be no assurance that any U Ethical product will achieve its targeted objectives or rate of return and no guarantee against loss resulting from an investment in any U Ethical product.
U Ethical (a registered business name of Uniting Ethical Investors Limited ABN 46 102 469 821 AFSL 294147). This material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. Before making any investment decision, you should therefore assess whether the material is appropriate for you and obtain financial advice tailored to you having regard to your individual objectives, financial situation, needs and circumstances. This document may include general commentary on investment methods, market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused.
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