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Peter Switzer’s economic outlook

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This is a tough job, but someone has to do it because the economy matters to how we invest. Over the years, I’ve had fights with the experts on my TV shows with some convincingly arguing that they don’t care much about what the economy will do because they look for economy-proof stocks.

 

The US fund manager WCM, which is behind the top performing ASX-listed WQG and WCMQ, have repeatedly told me that they look for companies that do well, even in recessions, and their 15.09% annual performance since inception over more than 10 years indicates it’s possible. However, this chart for Webjet (WEB) shows what an economy heading towards recession can do to a stock.

 

Webjet (WEB)

Source: yahoo.com

 

Webjet was a $13 company until the Coronavirus pulled the local and global economic rugs out from under it and it’s now a $3.32 company! This company’s February report excited the market and it was only the economic outlook that KO’d its share price.

 

Lots of companies are captives of the economy, so let’s see what is likely to happen to the local economy between now and the end of the year.

 

Let’s start with the International Monetary Fund’s view, which the Australian Financial Review headlined as “Australia stars as IMF paints bleak pandemic picture.”

 

Now I’m not saying these guys are infallible but it’s their job to assess all the data, and they think we contract over 2020 by 4.5% and this is better than their April call of 6.7%. They then think we grow strongly in 2021 at a 4% pace.

 

The growth numbers in the chart above show how significant a 4% number would be. In fact, Statista.com has a bigger contraction of 6.67% but also a bigger bounce than the IMF’s of 6.11% in 2021.

 

Under the headline “The recession-proof land down under, Statista.com saysAustralia has earned some much deserved praise and attention owing to the fact that it has managed to remain recession-free for the past twenty years…”, which in fact was 29 years. It points out our abundance of resources and a third of our exports going to China have been a big growth advantage for us.

 

And so the news that excited global stock markets, that the official China manufacturing Purchasing Managers’ Index (PMI) rose to 50.9 in June from 50.6 in May, is good news for our growth. Ditto for the services PMI, which lifted to 54.4 in June from 53.6 in May and also points to a stronger than expected Chinese economy. Any PMI over 50 means that the sector us expanding.

      

China PMI

Source: Trading Economics

 

You can see the slump towards 40 when the Coronavirus bit, but the rebound is very encouraging for China and, therefore, for Australia.

 

China accounts for a third of our exports, and exports account for 25% of our GDP. And so, this China PMI story helps make the IMF’s rosy call on Australia even more believable.

 

Let’s now see what the Reserve Bank of Australia is expecting for the rest of the year. In May, it tipped that the first half of the year would see a huge 10% decline, but if the IMF’s 4.5% contraction for 2020 is right, there must be a nice comeback in the September and December quarters, with the latter stronger than the former.

 

This is how the Reserve Bank of Australia (RBA) Economic Outlook publication put it: “The declines in the March quarter were driven by a contraction in Chinese and euro area activity as well as the rollout of containment measures elsewhere late in the quarter. A further fall in global GDP is expected in the June quarter, with many countries expected to record quarterly declines in GDP.”

 

Any good rebound of the economy was linked to social distancing success and containing second wave infections, so the recent Victorian infection experience is a bit of a fly in the ointment. 

 

The RBA is pretty blunt in its communique, using unexciting, eco-speak but it virtually says if we ignore good anti-virus practices we will pay the price via more lockdowns, a slower economy, higher unemployment, more bankruptcies and lower stock prices.

 

Their baseline case of an 8% economic decline for the year to June 30 shrinking to minus 6% by the end of December, implies that the economy grows by a touch over 2% in the second half of 2020.

 

This then explodes into 7% growth in the year to June 2021 and you’d have to hope this is right! Under this baseline scenario, unemployment peaks at 10% in June 2020 and one year later it’s 8.5%, showing how slowly the jobless rate falls after a recession.


Most people don’t have a great feeling for economic growth, but unemployment resonates, and so this chart above of the RBA’s three scenarios — upside, baseline and downside — show us what three possibilities could lie ahead for the economy, jobs and stock prices.

 

The upside case takes the unemployment rate down to near 5% by 2023, but if the baseline case prevails it would be above 6% and around 8% if we screw up our social distancing and the economic recovery.

 

For the upside scenario to happen, infections have to be contained, Government policies such as JobKeeper need to be sustained as long as needed to help household balance sheets or budgets, and we need to see that “…households and businesses expect a sustained economic recovery to build over coming months, underpinned by a high degree of confidence in the ongoing management of health outcomes.”

 

My guess is that we will end up between the upside and baseline case, with the delays on international travel a negative for economic growth. However, a big chunk of local overseas travellers will tour within Australia and that will be a big boost for tourism destinations such as the Gold Coast, the Sunshine Coast, Margaret River, Kakadu and Uluru. That means the export losses from killed off tourism from COVID-19, could be significantly offset by Aussies holidaying at home and dollars once spent in London, Paris, Rome and New York will be spent in local resorts, motels, JB Hi-Fi and Myer stores.

 

The improving local economy will be good for local-based businesses and their stock prices, so that could be a good basis for working out what stocks you want to invest in between now and the expected boom year of 2021.

Peter Switzer is the founder of the Switzer Financial Group. All prices and analysis at 1 July 2020. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.