Snapshot
RBA cuts rates to record low
Housing market boom continues due to recent rate cuts
COVID-19 – Buy or Sell?
Market Movements
| Opening Value at 5 February 2020 | Closing Value at 3 March 2020 | Movement | % Change | |
| ASX200 | 6,948.74 | 6,435.68 | -513.06 | -7.38% |
| Dow Jones Index | 28,807.63 | 25,917.41 | -2,890.22 | -10.03% |
| NASDAQ | 9,467.97 | 8,684.09 | -783.88 | -8.28% |
| AUD USD | 0.6737 | 0.6583 | -0.0154 | -2.29% |
| Gold (AUD/oz) | $2,306.62 | $2,492.33 | $185.71 | 8.05% |
| RBA Cash Rate | 0.75% | 0.5% | -0.25% |
RBA cuts rates to record low
At its meeting yesterday, the RBA decided to cut the cash rate to a record low of 0.5 per cent. The Board took this decision to support the economy as it responds to the global coronavirus outbreak.
“The coronavirus outbreak overseas is having a significant effect on the Australian economy at present, particularly in the education and travel sectors,” said RBA governor Philip Lowe in his statement today. “The global outbreak of the coronavirus is expected to delay progress in Australia towards full employment and the inflation target”. The RBA remained optimistic that the economy could rebound quickly once the outbreak was under control.
After yesterday’s rate cut, lenders have already started to reprice their offers. Westpac Group was the first major bank to pass on the full rate cut. A reduction in interest rates will see people with loans taking advantage of low-interest rates and paying down debt.
The US Federal Reserve announced an emergency rate cut overnight, reducing interest rates by 50 basis points after an unscheduled meeting. Fed Chairman Jerome Powell stated that while the “US economy is strong” this cut is intended to “boost household and business confidence” and offset any economic weakness that may arise due to the Coronavirus.
Housing market boom continues due to recent rate cuts
The RBA has been reluctant to cut rates due to the booming housing market, fearing that increasing house prices will lead to speculative borrowing & investor activity, as occurred during the last boom. However, the consistent underperformance of the Australian economy in combination with inflation remaining below target, weak wages growth and rising unemployment has effectively forced their hand.
CoreLogic’s February figures show annual property growth rates in Sydney and Melbourne of 10.9% and 10.7% respectively. Melbourne has now staged a nominal recovery, with housing values back at the same levels as the previous peak in September 2017 while Sydney prices remain 3.7% below their historic peak, with expectations that the market will fully recover from this dip by the end of May.
However, the strong growth rates in property have not translated into investor speculation as the RBA fears, with “demand for credit by investors remaining subdued” according to the RBA. The lack of significant spikes in investor activity along with the likelihood of APRA stepping in with targeted measures should this increase, is currently soothing the RBA’s fears over a low rate induced housing bubble.
COVID-19 – Buy or Sell?
As alluded to in our February update, the continued escalation of the Coronavirus, now referred to as COVID-19, is beginning to have an economic impact. This can be seen in both fundamentals, with numerous companies issuing profit warnings, and in stock market valuations, albeit the timing of these have been out of sync.
A relatively strong reporting season and the view that Chinas actions had successfully contained the virus, with strong stimulus measures and a quick growth turnaround expected, helped boost equity markets to all-time highs. However, this was contrasted with numerous companies withdrawing guidance figures for the March quarter and increasing hints that the shutdown in China was beginning to impact global supply chains, with a significant decrease in international container shipping.
The catalyst for the recent violent downturn in equity markets was the fear that containment of the virus to China had failed following the sudden escalation in confirmed cases throughout Iran, Italy and South Korea. As of writing there have been confirmed cases in over 80 countries, with this likely to increase further moving forward. The global realisation that containment efforts have so far failed and the mounting economic impacts, both on-demand and supply, have significantly increased the fears of a worldwide recession.
Central banks and governments are attempting to mitigate the economic impacts with increases in liquidity, via interest rate cuts and likely increase in quantitate easing, and targeted stimulus measures. However, the fact remains that lowering interest rates, increasing spending and targeted tax breaks can only do so much in the face of what is ultimately a health issue.
The key question moving forward is have markets overreacted in their recent drops or is their further to go?
A case can be made that the markets have overreacted in fear of the unknown and that economic impacts of COVID-19 will be short-lived. Strong stimulus packages from governments and central banks will provide a significant boost to demand, a lifeline to businesses currently affected and help enact a V-shaped recovery where there is a drop in GDP, but this quickly rebounds, allowing markets to look through the current negative news cycle.
Alternatively, until it can be shown that the virus has been successfully contained or a vaccine developed, the ongoing economic uncertainty and potential for significant quarantines in countries outside of China is likely to significantly slow consumer spending and business investment, creating a cascading economic impact leading to a global recession that central banks and debt-laden governments are ill-equipped to counter.
Ultimately COVID-19 will represent a strong buying opportunity for investors, to borrow from the wisdom of Warren Buffet, it is important to “be fearful when others are greedy and greedy when others are fearful.” However, at present, we believe a little fear is needed before taking the plunge and investing heavily.