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Newsletter 20

7 May 2020

Economic Impact of COVID-19

The human cost of the forced shut down by the coronavirus is immense. Unemployment is predicted to reach 10% and many folks businesses and jobs are gone forever. I’m sure we all know someone who has been affected. Pleasingly, there are positives notably the manner that communities have come together around the world. We have seen film clips of people singing on balconies, driveway ANZAC services and clapping in thanks for the health workers. Dolphins have been seen in the canals of Venice as well as cleaner air due to less traffic.

So what is happening on the economic front? Of course no one can predict the future, although some elements are reasonably apparent. There will be price deflation of products and services because demand has dried up. People worried about their jobs will save and limit their discretionary spending, e.g. the new car purchase will be put on hold for 12 months or so. Even when international travel opens up folks concerned about the health risk will likely stay at home preferring a less risky local holiday.

Equity markets appear to have recovered; however this may be a false dawn. Companies are unable to forecast future earnings which is used in the calculation of Price Earnings ratio. As you may be aware stock markets trade on future (9-18 months) PE ratios. So if the “E” in PE is not known, how can the market continue to trade as these levels?  This is why I say it may be a false dawn.

It is important to understand that central banks and governments across the globe have co-ordinated their fiscal and monetary responses. In particular, the US Federal Reserve has taken extraordinary and unheard of steps to ensure that debt and equity markets remain open. 

If you are a younger client then it is important to ride it out as it is time in the market and not trying to time the market that matters. You only know 6 months in hindsight when the bottom occurred.

For clients approaching retirement or that have retired, we believe the strategies we have put in place will limit the downside impacts. 

If you wish to discuss the above or your circumstances, please feel free to contact us.

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