Emma Fisher: A (mostly) good news story

It is an unfortunate, yet widely accepted maxim that good news doesn’t sell newspapers. If true, papers must be selling like hotcakes at the moment, as it seems the headlines have never been more dire. But as we reflect on the end of another 12 months that leaves us wanting to see the word “unprecedented” banned from the dictionary, we allow ourselves to feel cautiously optimistic. 

Household and corporate balance sheets are in great shape, and this is enhanced by international border closures. Australians spend $65 billion a year overseas, and that money is now trapped in our local economy. While we lose out on the $45 billion we typically bring in from tourists annually, these imported tourist dollars tend to find their way only into very targeted parts of the economy; naturally, the travel, tourism, and hotel sectors. 

By contrast, trapped locals are spending widely across the economy and saving too: we’re seeing it in record deposit levels for the banks, in booming retail spend, rebounding new car sales and record used car prices. It’s becoming clear that international borders are likely to remain shut for a while yet, particularly given the spread of COVID variants, so we expect this “spend local” dynamic to continue.

The economic backdrop is further supported by rising house prices and record-high iron ore prices. So far, the pandemic has wrought far less economic damage for Australia than other countries, yet the performance of our stock market has lagged, only recently exceeding pre-pandemic highs. As explained below, in October 2020 our market was one of the worst-performing major markets, despite our economy being one of the most resilient in the world. 

We made the case six months ago that the Australian market looked like good value in a relative sense, and the subsequent 10% rally into financial year end likely reflects that.

However, Australia seems to have fallen into an unfortunate bucket of countries that controlled the pandemic very well in 2020, only for things to deteriorate in 2021. As we enter our sixth week of lockdown in NSW, with case numbers rising and no apparent end to restrictions in sight, it is tempting to subscribe to the exclusive doom and gloom peddled by newspapers. We are not epidemiologists, in fact we can barely spell the word, and make no attempt to forecast how the virus situation might unfold from here. However, if we consider the implications for the Australian economy (and by extension, the stock market), we note the three key drivers of the dazzling economic recovery of the last 12 months were: monetary policy (low interest rates), fiscal policy (JobKeeper in particular) and closed international borders. This resurgence of local transmission has all but enshrined “lower for longer interest rates”, at a time where the debate was shifting to when to tighten. It will also likely mean our international borders remain shut for longer, given the havoc wreaked by COVID variants like Delta elsewhere in the world. While at the time of writing, no federal government fiscal response has been announced, we would be betting on JobKeeper 3.0. We are not arguing this lockdown/virus breakout will be good news for the economy, however we believe it can be managed in the months it takes to get to an acceptable vaccination level.

 

Read the rest of the article including the risks to this outlook and Emma's observations from the road on Livewire here.