× Home Modules Articles Videos Life Events Calculators Quiz Jargon Login
☰ Menu

Weekly market update - 20th of April 2020

Written and accurate as at: Apr 20, 2020 Current Stats & Facts

Global improvements in the health situation underpinned a 1.9 per cent gain for thel ASX last week. This has prompted a shift in the debate to how quickly economies can begin to re-open.

The divergence in health outcomes here versus Europe and the US is becoming increasingly important. It gives Australia the option of an “elimination/suppression” strategy rather than herd immunity approach. This means a more expansive initial re-opening of the economy is possible. This has important implications for the outlook at companies and for portfolio construction.


Health update

Global new daily cases have stabilised and the rate of hospitalisations in the US has continued to fall this month. This is important because it opens discussion on how economies ramp up again.

However, it must be borne in mind that in some countries such as Spain, the rate of reduction in new cases is far slower than the original rise. In other words, the rise and fall has not been symmetric.

That means total cases must still be managed carefully against health care system capacity. We also continue to monitor places such as Japan to help understand the risk of a second wave of infections as economies open up.

There was some excitement last week around antibody tests and medical trials.  Nothing conclusive could be drawn. Samples sizes were too small or control samples not robust enough for policymakers to change tack in response. But the market’s optimistic reaction was instructive and demonstrates how much liquidity there is sloshing about, looking for any excuse to find a home.

That said, it’s becoming evident from intensive care units in New York, that throwing everything at a patient in terms of potential treatments is having success in saving lives – even if the reasons why are not clearly understood.  This is important because it provides some help in managing the mortality rate. For countries such as the US and Europe, there is no option but to adopt a herd immunity strategy. The balance here is how much of the economy can be opened up while keeping the caseload manageable. Anything that helps dampen the caseload and its severity mean fewer economic restrictions need to remain in place.

The rate of daily new cases in Australia does look somewhat more symmetrical — and has fallen sharply. If the virus can be effectively suppressed, this allows the option of locking down borders but opening up the domestic economy more than would be the case in a country pursuing herd immunity.

Policy and economy

There was little news-flow on the policy front last week, however, economic data is starting to filter through. Business confidence indicators have fallen twice as far as during the GFC – although we are likely to see a snap-back in response to falling infection rates.

Nevertheless, it is becoming apparent from talking to companies that we are unlikely to see a rapid return to business-as-usual in terms of structure. A degree of shell shock may prompt a more cautious approach for a period. This could feed through to investment, capital structures and business models. Many companies are unlikely to reinstate their furloughed workforces in full.

This is important to keep in mind when we think about the trajectory at which the economy will recover from its current position.


The US market has surged in recent weeks and recaptured almost 60% of its fall. It has returned to the levels of mid last year. Some are asking if this is credible given the economy may contract 10% or more this year. A large proportion of the recovery is also concentrated in a relatively small number of growth tech stocks.  We remain relatively cautious in the near term given the uncertainty around earnings and the potential sticker shock. But we are also mindful of the tide of liquidity looking for home. This has helped propel the growth stocks – given a lot of money has been chasing stocks with the greatest earnings certainty.  We are seeing large divergences in relative valuations and a lot of mispricing. 

Australia’s market has not rebounded at the same rate as the US. We are back to the point of the late-2018 low. This is partly because we don’t have the big growth stocks to dominate performance. However we still think the Australian market is well positioned versus other overseas markets given the potential differences in the path of economic normalisation.

Information technology (+6.9%) did best last week, driven by Afterpay (APT, +31.8%). Industrials (+6.1%) also outperformed as the infrastructure stock rallied. Energy (-2.1%) gave back some previous gains as reality tempered some of the post-deal optimism of last week. At current rates global storage is likely to be filled in May, putting further pressure on the price. There is enormous leverage to any sense the economies will open up again. However, at this point the near term looks challenged.

Flight Centre (FLT, -9.0%) gave back some of the gains it made in the wake of a capital raising. As that stock becomes available to sell, it will be interesting to see the price action this week as an indicator of sentiment.  Coca-Cola Amatil’s (CCL, -8.3%) fall is notable as a potential precursor of the reality that which may weigh on the market’s recent buoyancy. CCL released a trading update that showed volumes in the first two weeks of April were down by 30% on the prior corresponding period — including a 15% fall in Australia and a 50% fall in Indonesia. There is some base effect here — the periods leading into Easter and Ramadan are usually strong. Nevertheless the market’s reaction to some hard data underlines a point we have been making in recent weeks – the rebound may peter out as the economic and earnings reality impacts on sentiment.

Some of the REITs sold off. Unibail-Rodamco-Westfield (URW, -8.0%) was off, along with Vicinity Centres (VCS, -1.4%) and Goodman Group (GMG, -1.0%). We expect to see some capital calls come through in the REIT space in coming weeks.

Santos (STO, -6.9%) was the weakest of the ASX 100 energy names. Beach Petroleum (BPE, -6.7%) was off, as was Woodside (WPL, -3.5%).  James Hardie (JHX, -5.1%) sold off as the market began to digest the near-term negative impact on North American housing. This is well understood in notional terms, but there are signs the emerging evidence may cause some sticker shock. Housing is an area of natural government stimulus in Australia and the US — given it is one of the swiftest means to grow employment.

QBE (QBE, -3.4%) surprised the market with a capital raise – not the first company to do so during this episode and probably not the last. QBE’s current position looks capable of dealing with the impact on their investment books and also rising claims in some parts of its book, such as trade credit. However, management has raised capital as a buffer against another unforeseen event arising during this period.

Insurers have generally been seen as beneficiaries of the current environment. General insurers, for example, have seen car accident claims fall by as much as 50%. But there may be an impact on gross written premiums in the small-to-medium enterprise book in 2021 if companies cut insurance cover to control costs in a tough environment.

Afterpay (APT, +31.8%) was the best performer in the ASX 100. Its outperformance is consistent with a continued surge in tech growth stocks in the US. The NASDAQ is re-approaching its highs on the back of Amazon. APT updated the market. The Australian business continues to track well, although management was cautious on the outlook for the US, which is consistent with the health outcomes unfolding in each country. We are mindful people may be using APT to help address near-term cash flow issues while waiting for government payments. Looking through this, there is still a possibility of materially softer baseline for consumer demand, which may impact APT’s volumes.

China’s relative safe-haven status saw A2 Milk (A2M, +12.3%) continue to perform. Hope that AMP (AMP, +11.9%) may still be able to conduct the sale of its Life business – a critical plank in its strategy – pushed it higher.

Gold miners did well, led by Newcrest (NCM, +11.4%).

There is some noise that elective surgeries may resume sooner than first expected, which was welcome for Sonic Healthcare (SHL, +10.6%) and Ramsay Health Care (RHC, +10.5%). We still see material earnings risk for SHL and the possibility that they may need to raise capital.

Reliance Worldwide’s (RWC, +10.5%) shift was interesting relative to JHX, given they are leveraged to similar trends. There may have been some rotation given that JHX has outperformed thus far.

The transport infrastructure names all saw a rebound. Sydney Airport (SYD, +9.8%), Atlas Arteria (ALX, +9.7%) and Transurban (TCL, +7.3%) were up as slowing infection rates prompted discussion of how soon traffic –and domestic flights – might start to rise.

Star Entertainment (SRG, +8.3%) also gave an update which included an additional debt-funding facility of $200 million. Management is now confident they have an ability to ride out an extended shutdown. One key feature of the slot-gaming part of casino businesses is they rely on a relatively small number of high-usage players. It remains to be seen whether all of these players return following the shut-down period.

You may also be interested in...

no related content

Follow us

View Terms and conditions