This financial year has proved to be another up and down one for the Australian share market, albeit with much larger swings than we have had at times since the global financial crisis. The US-China trade tensions and Brexit dominated in the first half of fiscal year 2020 and just when there were signs of concerns abating, the coronavirus (COVID-19) emerged which is still posing the biggest threat to the global economy.
The third quarter was a very difficult one for investors as share markets saw a very quick sell-off as the pandemic started to spread out of China to Asia, Europe, and the USA. After the S&P/ASX 200 peaked on 20th February at 7,162 points, the index rapidly reversed the gains of previous years as panicked investors sold-off equities on the back of growing COVID-19 fears.
Nevertheless, global markets then staged a quick but cautious recovery in the final quarter of this financial year, in part driven by optimism that a coronavirus vaccine will be available later this year and additionally, on the back of rising confidence in unprecedented levels of fiscal and monetary stimulus by various governments and central banks. After declining 36.5% to a low of 4,546 points on 23 March 2020, the S&P/ASX 200 recovered strongly in the last quarter, to be down only 10.9% to 5,898 points on 30 June 2020 as relaxing social restrictions continued to stir hopes for an economic rebound, the re opening of industries, and a quick return of pent-up consumer demand. In comparison, the MSCI All Country World Index gained 0.3% to 525 points, the S&P 500 was up 5.4% to 3,100 points, China’s Shanghai Composite edged 0.2% higher to 2,985 points, and Europe’s Stoxx 600 Index underperformed — down 6.4% to 360 points.
The Australian share market finished the year with the Healthcare and Information Technology sectors the standouts — rallying 26% and 18% respectively. On the other hand, the Financial and Energy sectors were the weakest — declining 25% and 31% respectively. The subsequent depth of the fallout from COVID-19 to the real economy also led to most companies withdrawing or revising guidance, and some also reducing or suspending dividends, along with a subdued outlook commentaries.
Most commodity prices (with the exception of gold) fell sharply in the third quarter as countries around the world nearly halted activity to contain the virus, which adversely affected demand for most commodities. The quoted iron ore price rose from around US$80/tonne in late March 2020 to US$99/tonne at the end of June 2020 driven by a combination of robust Chinese demand and supply constraints in Brazil. Oil was caught in a perfect storm due to the COVID-19-induced slowdown and an increase in production by OPEC nations. This led to oil falling 56% from US$62/barrel at the end of June 2019 to US$27/barrel at the end of April 2020 before recovering partly to finish the year at US$41/barrel. Gold, the traditional ‘safe haven’ commodity, rallied a solid 25% to US$1770/oz on the back of fears of a global recession, aggressive easing measures by the major central banks in response to COVID-19, and the prevailing low interest rates globally — an environment supportive of gold.
Domestically, the Reserve Bank of Australia (RBA) cut the official cash rate three times during the fiscal year — 25 basis points in October 2019 and then 25 basis points twice in March including an emergency out of cycle meeting — to end the financial year at a historic low of 0.25% as the coronavirus pandemic continues to stoke economic fears.
The Australian dollar also hit a low of US57 cents during the 3rd quarter — its lowest level since 2002, before recovering sharply to finish the year at US68.5 cents as low interest rates, trade tensions, and the recent bushfires all played off against each other along with volatile commodity prices.
The latest Australian GDP data showed the economy contracted 0.3% in the March 2020 quarter to be up only 1.4% year-on-year despite increased government spending as consumer spending deteriorated and residential construction activity weakened. Underlying inflation at 1.8% continued to remain below the RBA’s target range of between 2% and 3%.
Against the global backdrop of elevated risk, we now expect the global economy to contract by 3.5% in CY20 before returning to a growth of 5.5% in CY21. As regards the Australian economy, we forecast a contraction of 3.2% in CY20 as negative household consumption, weaker dwelling construction and private business investment, and lower exports are only partly offset by much higher government spending before it turnarounds to growth of 1.9% in CY21.
Looking ahead, investors are likely to remain cautious. While a variety of recent data seems to support the expectations of a V-shaped economic recovery, the level of activity remains dramatically lower than before COVID-19 although most economies are no longer in systematic lockdown. Overall, investor confidence is heavily reliant upon the success achieved by governments, health authorities and communities in suppressing the spread of the virus so a degree of normality can return to society and the economy.
Against this volatile economic background, the Australian share market is currently valued on a forward consensus price earnings (PE) ratio of 18.6x, which is 27% above the long term average of 14.6x. The forward consensus dividend yield for the Australian share market is 3.3% (80% franked) — or 4.4% grossed-up. However, we expect further earnings and dividend downgrades over the coming months.