Why Australia will not experience a ‘V’ shape recovery

Despite the flattening of the COVID-19 curve, and the massive injection of stimulus injected by the Australian government both in terms of helping business to survive and retain their workers and the provision of cash to effected households, we forecast that the economy will not be back to pre-COVID-19 times until at least 2022. The Reserve Bank has forecasted that unemployment could reach 10% this year and remain high until the end of 2021.

However, on a more positive note, the slow but welcomed recover we anticipate will begin towards the end of this calendar year.  The factors affecting the speed of the recovery include:

COVID-19

Whilst there has been positive talk surrounding the “flattening of the curve” we need to remember that there is still no cure for this virus. Australia has just entered its winter months, particularly the months of July and August when it is more prevalent for Australians to catch colds, flu and viruses. Needless to say, if there is a second outbreak or pandemic, the above predictions will appear optimistic.

Global demand

Australia’s major trading partner is China. China’s economic growth for 2020 is predicted to decline to below 2%. If this is the case, then this will be China’s worst economic growth since the 1970s.

Employment

Some economic and financial commentators are predicting unemployment to reach 10%. Global growth, consumer and business confidence and the size and scale of future infrastructure projects will determine the rate of re-employment. Nonetheless, there is no doubt that all businesses will not be saved by the stimulus package nor will all employees return to their pre- COVID-19 normal working hours.

Traditionally, businesses retrench employees faster than the rate they rehire them. Given the cost of labour, employee entitlements and costs such as payroll tax, employers are slow to rehire. Employers tend to wait until there are clear signs of increased demand for their products or services before re-hiring.

So what does this mean for investment selection? Many clients will be aware that over the past 18 months we have been overweight in cash. Our ‘Balanced” portfolio was recommending clients hold between 20-30% in cash. Many readers may be surprised by that allocation but our primary reason for that was:

  • Australian shares – our research showed that they were the best and safest option, particularly for pre-retirees and retirees. The size of the dividend, particularly when compared to the interest rate paid on cash and term deposits, was a positive and the tax benefits from the franking credits were invaluable
  • International Shares – we were underweight. Our main concerns surrounded the toing and froing with BREXIT. Will it happen, won’t it happen. Oh my, how long did that go on for?
  • Trump! Will he say something stupid? What about the constant trade wars with China? What he said, what he meant to say and “fake news”!
  • Australian Direct Property – we have felt for a number of years that the rental returns are poor, particularly the net rental returns. Whilst interest rates are low, the maintenance cost, strata levies etc have a major effect on the net return. Land Tax – it is ridiculous that the state government taxes you on the appreciation in the value of the land each year and the Federal Government taxes you Capital Gains Tax on that same appreciation in land value when you sell the property investment.

So where to with our investment strategy now. Well, in short, we are only looking at quality assets. In the case of shares, we pay particular attention to the quality of the assets on the Balance Sheet. We obviously want the business to be profitable but we do not have the appetite to invest in companies holding a large degree of debt.

We are reluctant to invest in industries that will be greatly affected by COVID-19 such as retail businesses and commercial properties. Whilst we appreciate that there may be value in these sectors, the security of capital is critical. Our focus is on investments that will survive these uncertain times as opposed to speculative investments. We prefer well-capitalised companies with quality assets and have a low debt to asset ratio.

Conclusion

Investors should have a well-considered long term financial plan. That financial plan should outline the investor’s key goals and objectives and an appropriate investment strategy to achieve these objectives.

The portfolio, as always, should be diversified and the investments should be in quality assets rather than speculative assets. The key difference between quality and speculative assets is the strength of the company’s balance sheet and credit rating.

We do not recommend that clients reweight their portfolio overnight. We are slowly making investment recommendations but we are advocates for an investment approach known as Dollar Cost Averaging where investors enter the investment market or reallocate their portfolio of investments slowly.

Should you require more information about investing, contact Peter Quinn now by submitting an online enquiry or call us on +61 2 9580 9166 to book an appointment. We also offer a FREE 45-minute consultation should you have other financial planning, taxation or superannuation issues you may wish to discuss.

The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it.  It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.