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Reconciling the disconnect

Written and accurate as at: Aug 18, 2020 Current Stats & Facts

Central banks and governments continue to prop up economies via monetary easing and fiscal measures whilst cyclical indicators remain weak, with most economic indicators such as unemployment figures and PMIs showing weakness.

While markets have shown strength, risks remain. The extent to which there is a disconnect between share markets and what is happening on the ground remains a focal point. Geopolitical risks, while ever-present, continue to impact market volatility. Tensions between the US and China are elevated, and the outcome of the US presidential election in November remains uncertain.


Finally, the rise in the number of COVID-19 cases globally continues to create uncertainty as to the shape of any recovery. An important factor in the coming months will be the extent to which governments continue with fiscal measures to support the economy.

Australian Equities

The recovery in Australian shares was cut short in July amid reports of growing Covid-19 cases and anticipation of harsher restrictions in Victoria. Early in August, the Victorian government announced a state of disaster and moved to stage four lockdown, which will see an estimated 1 million people restricted from going to and from their workplace for at least six weeks, while only essential businesses including supermarkets and pharmacies may remain open. The S&P/ASX 200 Index gained 0.5% over the month, dragged down by the energy and health care sectors.

Materials performed well over the month, with strong returns from Fortescue Metals Group (+25.7%) and Oz Minerals (+24.4%). In early earnings reporting, Rio Tinto (+4.2%) announced that 1H 2020 EBIDTA fell 6% on the prior corresponding period due to lower commodity prices during the half but reconfirmed its 2020 production guidance across all commodities. Wesfarmers (+3.8%) gave a Covid-19 update following Victoria’s lockdown announcement: all of the group’s retail businesses will continue online operations through home delivery and contactless click and collect, while Bunnings will remain open for trade customers only. In FY20, Wesfarmers derived approximately 17% of retail sales from stores within metro Melbourne.

Global Equities

Global shares continued their march higher in July, rising 0.6% in Australian dollar terms.  With around half of S&P 500 companies having reported at the time of writing, it is clear earnings have been severely affected by the pandemic. Nonetheless, the US share market has been supported by the ‘big four’ tech giants (Amazon, Apple, Facebook, and Google), all of which beat estimates.

Amazon (+14.7%) was arguably the biggest winner, reporting the largest quarterly net profit in its history, nearly double that of the corresponding quarter in 2019. Apple (+16.5%) reported revenue of US$59.7 billion, above estimates of US$52.2 billion, while every major product line saw year-on-year growth and beat analyst expectations. Microsoft shares (+0.7%) posted modest gains as the company tried to salvage a deal to buy TikTok’s US operations.

Across the Atlantic, EU leaders have been relatively successful in containing the Covid-19 virus and providing much-needed fiscal support. In July the European Council approved a €750 billion package to fund fiscal transfers between member states. Since March, the euro has been on the rise against the US dollar as investors see European assets as increasingly attractive.

Fixed Interest

July saw further compression in yields and a tightening in spreads as central bank liquidity continued to flood the market. In the US, the Fed intends to hold the funds' rate near zero until the economy has weathered the pandemic. Broad support from the Fed and its presence in the ETF market have helped to tighten spreads across both investment grade and high yield segments. The Fed also includes ‘fallen angels’ in its corporate bond purchases, while the European Central Bank has been more targeted in its approach, resulting in euro high yield being more exposed to volatility.

Listed property

Australian listed property was mixed over July as the economic pain from the pandemic rolled on. Shopping centres, which play a prominent role in the listed property index, remain affected by reduced foot traffic and struggling tenants. Scentre Group (-6.0%) gave an update on its half-year results, noting that the carrying value of its property portfolio as at 30 June 2020 will be down approximately 10% from the end of 2019, with Covid-19 impacts the overriding reason. Meanwhile, some diversified and industrial funds have held up reasonably well during the crisis. Charter Hall's Long WALE REIT (+8.2%) has been spared the worst despite one of its tenants, Virgin Australia, vacating its Brisbane headquarters.

In the US, listed property returned 3.6% in US dollar terms, boosted by warehouse and industrial property (+12.5%) and dragged down by shopping centres (-10.2%) and hotels (-7.8%). Globally, developed market REITs returned 1.4% in Australian dollar hedged terms.


Preliminary estimates for July indicate that the index increased by 0.9 per cent (on a monthly average basis) in SDR terms, after decreasing by 0.2 per cent in June (revised). The non-rural and base metals sub-indices increased in the month, while the rural sub-index decreased. In Australian dollar terms, the index decreased by 0.2 per cent in July.  Over the past year, the alternative index has decreased by 12 per cent in SDR terms, led by lower coal, iron ore, LNG and oil prices. The alternative index has decreased by 12.1 per cent in Australian dollar terms.

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