The dreaded "R" word
Australia’s consecutive quarter of negative GDP growth has seen the word "recession" surface in headlines. But what does this mean for the Australian economy?
We remind ourselves that the National Accounts offer a ‘backwards-looking’ perspective on the economy - hence the collapse in GDP relates to the 3 months to the end of June.
Sometimes this ‘report card’ tells us how an economy is evolving, and sometimes it simply paints a picture of what happened and does not help in illuminating the path forward. These accounts represent the latter in our view.
Why? Because the GDP figure and the circumstances that created them are so unique.
As we all know well, this recession has resulted from a shutdown of the Australian economy in Q2 and now Q3 in Victoria. This is different from the cycles we have seen in the past: where central or commercial banks tightening credit, there is subsequent deleveraging, job losses, and detachment of workers.
This recession is not a function of the pro-typical short-term credit cycle, nor completely an external shock (e.g. war) or a rapid change in external prices (interest rates or commodity prices).
For corporates, central bank actions have prevented painful deleveraging, stabilised the cost of debt through direct asset purchases or the promise to do so – making sure funding is available. Corporates have subsequently raised capital, drawn down debt and built liquidity buffers.
In addition, household disposable income is higher. An unprecedented level of transfer payments/support programs (JobKeeper and JobSeeker) and government lending programs have filled the income gap to prevent painful deleveraging by households and SMEs, falls in asset prices and much of the associated hit to confidence.
The collapse in economic activity reported in the GDP data is almost entirely the result of a reduction in household consumption, including the impact on businesses of reduced imports.
With higher income and lower consumption, all the recessions ‘cost’ (lower spending) has been transferred to households' balance sheets in the form of higher savings.
We are yet to see if the damage from the fall in consumption creates a permanent rise in unemployment, vast detachment of workers, ongoing deleveraging and painful shrinking of balance sheets. Will such a cycle reinforce the falls consumer confidence, leading to permanently lower consumption?
Or will the measures taken so far have to avoid this provide a sufficient buffer for business and consumption to recover?
We can see pockets of our economy in which the destructive path is more likely, and other parts that will benefit from the crisis, assuming a level of central bank and fiscal support is maintained.
Tech wreck dent?
Those who follow the market are no doubt aware of the news overnight of a dramatic selloff in the ‘tech-heavy’ NASDAQ Composite Index (down 5%).
This spilled over to the broader market, as seen in the declines of the Dow Jones Index and S&P500 Index (down 2.8% and 3.5%), with these indexes also being heavily influenced by the largest software and technology names.
Falls in stocks such as Microsoft, Amazon, Tesla and Zoom may prove significant to the overall market in coming weeks.
However, a testament to the almost vertical rise in stocks in recent weeks is that the NASDAQ index has only fallen back to levels it first reached Tuesday.
As a reminder we hold very little exposure to ‘tech names’ in your portfolio today and are carrying more than 14% cash in the equity portfolio. We have a preponderance of exposure to ‘value names’, and have been selling 30-80% of the holdings in stocks that we felt have rallied too hard over recent months, including strong portfolio performers such as Pushpay, BHP, James Hardie, Healius and Mineral Resources.
It is also important to note that the Australian market has dramatically under-performed the US indexes, except for our tech index (which is a much smaller proportion of the Australian market) which is up 150% from its March lows.
Monday marked the deadline for the remainder of your companies to report to the ASX their profits and outlook. We will follow up with a more comprehensive review of the FY-20 reporting season in the coming weeks. However, it has in general been a positive reporting season for your companies, as reflected in performance for the financial year thus far.