Quarterly Economic Update – October 2020

Dr. Steve Garth and Billy Oswell from our Investment Committee summarise the highlights from the third quarter and discuss the future outlook.

• Economic recovery hopes offset by mixed progress in containing the virus
• US tech giants led gains in Q3, but sold off sharply in final month
• Emerging markets, led by China, outpaced developed markets
• Among sectors, consumer & IT led gains; financials & energy lagged
• REITs were mixed – positive in Australia, but negative elsewhere
• Positive credit and term premiums boosted bond returns


Global Markets Summary

The dramatic turnaround in global equity markets from the coronavirus-induced slump in March continued in the September quarter, although prices fell back in the final month of the quarter after global benchmarks hit record highs.

News headlines in the quarter were dominated on the one hand by hopes of a global economic recovery and progress in the development of a COVID-19 vaccine, and on the other hand by stop-start efforts to contain the pandemic.

Policymakers such as the Reserve Bank of Australia noted that while the global economy was bouncing back from the severe contraction caused by the pandemic, the recovery was uneven and dependent on containment of the virus.1 The US Federal Reserve made similar comments in September, vowing to keep interest rates near zero until 2023. While the recovery had progressed more quickly than expected, it said activity was still well below pre-pandemic levels.

The economic impacts of virus-induced lockdowns were evident in GDP reports for Australia and New Zealand, where activity shrank by a record 7% and 12% respectively in the June quarter. It is Australia’s first recession in 30 years. Nevertheless, equities’ recovery from March’s severe sell-off continued. By late August, the Global MSCI All Country World Index had surpassed the previous record high set in February, representing a near 50% recovery from the March 20 lows.

Global stocks were up nearly 4% on the quarter in AUD terms. The Australian market has been a comparative underperformer in 2020. While it recovered more than 30% from the March lows, it delivered flat returns in the September quarter, to be down around 10% for the year to date.