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Australian and Global update - 13th of March 2020

Written and accurate as at: Mar 13, 2020 Current Stats & Facts

The spread of Covid-19 and subsequent policy responses saw sharp market swings and a spike in volatility in equity markets this week. The oil price plunged as both Russia and the Saudis walked away from the existing agreement on production cuts. The US Fed responded with a $1.5 trillion intervention aimed to support the oil price. Albeit, seemingly in vain given the rout on oil continued.

China (ex-Hubei province), Singapore and Taiwan were among the first countries affected and are helping guide government expectations elsewhere in the world. In these countries, containment measures have focused on delaying the virus’s spread and extending peak infections over a period long enough to enable medical infrastructure to cope with demand. The result has been successful, considering a mortality rate of 0.7% versus 5.8% in Hubei. The number of new daily cases is now falling in these countries. The most recent data suggests that South Korea sees a similar improvement.

The trade-off has been a virtual economic shutdown for an extended period. If other governments follow this lead, the question becomes how prolonged and severe is the downturn in each country – and how effectively can governments stimulate to plug the gap. Further widespread rate-cuts look likely, and details are emerging on various stimulus packages. In Australia, the government announced a $17.6 billion stimulus package with $11 billion of this project to flow into the economy by June.

The plan has four key components;

  1. Household stimulus payments - around 6.5 million lower-income Australians will receive a one-off and tax-free $750 payment
  2. Small and medium-size business – Around 690,000 businesses will receive up to $25,000 to help cover the cost of salaries.
  3. Apprentice subsidy – a wage subsidy of 50% will be provided assist employers retain apprentice employees for up to 9 months effective 1 January 2020
  4. Business investment incentive – business will be able to instantaneously write-off (rather than depreciate a little each year) the cost of an asset if it less than $150,000. This incentive is only applicable for 15 months.

One key question will be the strength of behavioural factors. Will stimulus be able to outweigh the effect of “social distancing” as people reduce interactions with others?

We can look at the way forward in four broad scenarios:

  1. Widespread global pandemic – a worst-case scenario provoking a sustained global recession, zero rates, unconventional policy responses and further material falls (>20%) in the equity market. We think this is a low-probability outcome.
  2. Rolling outbreaks globally – short-term economic downturns of 2-4% followed by a quick recovery. Policy responses could include zero rates and targeted fiscal stimulus. This scenario could see further markets falls – potentially up to 10% or so – but a bounce-back by the year’s end.
  3. Milder outbreak – containment measures and the northern hemisphere Spring curtail the spread. This could see a short-term slow-down with rate cuts and limited fiscal stimulus. The market may already have seen its lows if this is the case, with a good chance of a 10-20% bounce.
  4. Quick resolution – a medical breakthrough could see economic acceleration, a reversal in rate cuts, bonds falling sharply and a 20%+ rally in equities. Like the negative extreme, we see this as a low probability outcome.

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