Investor update: 22 June 2020

Investors optimistic despite “profound uncertainty”, looming market corrections.

Spurred on by escalating policy support from the US Federal Reserve on the American economy, the S&P/ASX200 saw its biggest one day gain since April, surging 3.9% last Tuesday. What to make of the market rally? In the June RBA board meeting, the minutes contained a clear warning for investors that equity markets have become a little frothy, and investors should be prepared for bouts of brutal corrections. Investors – as evidenced by the robust rebound in the local share market on Tuesday – are acting as if the coronavirus pandemic was nothing more than a temporary, albeit inconvenient, setback. Contrasting this optimism, the International Monetary Fund (IMF) will likely forecast a worse contraction in the global economy than previously estimated for 2020 and warns of "profound uncertainty" about the path of recovery.

According to Chief Investment Officer James Cook, with fundamentals and forward valuations still highly uncertain, sentiment shifts will swing dramatically maintaining the heightened state of market volatility.

“Our major consideration remains the assessment as to how much of the news and future prospects have been discounted by the markets and is the current pricing of equities and bonds fair. We still believe there is greater downside risk than upside and maintain a cautious approach across portfolio strategies,” he said.

Job numbers worrying but prospects positive?

New numbers from the Australian Bureau of Statistics show another jump in the unemployment rate to 7.1%, the worst in 19 years. The economy has now shed 227,700 jobs over the course of the pandemic exceeding expectations. This is no doubt concerning. It may not all be bad news however as, the Australian job market saw some tangible improvements with payroll data showing that around 124,000 jobs were added in May. Job ads are also up with data released by SEEK last Thursday showing an increase of 60.6 per cent in the fortnight ending June 7, compared to the average during the darkest days of the lockdown in April.

No respite for tourism?

Australia is unlikely to see international tourists in 2020, barring any unexpected advances in vaccine development or treatment. A deflating outcome for tourism and hospitably sectors already hard hit from the bushfire season. Will a resurgence in domestic travel make up the shortfall? Or will further stimulus be required to keep operators in business? Particularly concerning is the impact this will have on low-paid and casual workers in the sector.

Last week the renewed lockdown measures in Beijing came as a grave warning to the rest of the world amid the exit of their lockdown and easing of restrictions.⁵ As China had declared victory over COVID-19 in March, this alarming ‘backtrack’ signals not only a continued pause to international travel but renewed trade disruptions.

We’ll continue to update you on how we are managing market outcomes in our portfolios.

Until next time, wishing you a safe and happy week.

Kind regards,

David Brennan – Director Distribution

[1] https://www.afr.com/markets/equity-markets/australian-shares-to-lift-as-record-us-retail-sales-drives-markets-20200617-p553aa

[2] https://www.afr.com/markets/equity-markets/rba-voices-unease-about-soaring-share-prices-20200614-p552d4

[3] https://www.afr.com/policy/economy/imf-sees-profound-uncertainty-about-global-recovery-20200617-p553a8

[3] https://www.afr.com/policy/economy/economy-added-124-000-jobs-in-may-20200615-p552u3

[5] https://www.theage.com.au/world/asia/new-beijing-outbreak-raises-fears-for-the-rest-of-the-world-20200618-p553pg.html

Important Information:

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 is 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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