Coronavirus Update #8

This week the Australian market started well, lost ground in the wake of downbeat job figures (Thursday) only to rally late and finish square at close of trading today.

It had the potential to be much worse considering figures released yesterday by the Australian Bureau of Statistics showed unemployment jumped from 5.2 per cent to 6.2 per cent in April – the highest since September 2015 – with total employment collapsing by almost 600,000 for the worst monthly decline on record. More than 6 million Australians are now on the JobKeeper wage subsidy and more than 1.6 million on JobSeeker unemployment benefits, with young workers the hardest hit.

The RBA announced it is forecasting a 10% fall in GDP for the first half of 2020 and a 6% bounce in 2021; they expect the unemployment rate to hit 10% in the coming months, before falling to 7% by year end; and they are now forecasting deflation for 2020. Reiterating its commitment to keep interest rates at 0.25% for an extended period, they also took the time to put together this handy cheat-sheet to help explain Unconventional monetary policy.

When it comes to markets our view remains one of caution. And, it would seem we are in good company. Last weekend, the famous Berkshire Hathaway annual meeting (hosted by Yahoo Finance) was held to an empty hall. Mr Buffett and his partner Charlie Munger are two of the most influential investors in the world, hence it was of great interest to many that they announced they had not used the March bear market to buy any equities, despite sitting on $137 billion in cash. From a man who is famous for his maxim “be fearful when others are greedy and greedy when others are fearful” it certainly sent a strong message.

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Prime Minister Scott Morrison has announced his three-step plan to reopen Australia. ” Some 850,000 people will be back in work as a result of stage one, two and three restrictions being lifted,” he said – Let’s hope so!

Australia has either handled the virus well or gotten lucky (depending on which side of the political spectrum you sit). There is no denying that our Covid stats are truly impressive. Of the 37 OECD countries, Australia has the lowest number of Covid cases per capita (just 35 per million); the US has the worst record with 2,877 cases per million. Despite our mild experience of the Covid virus, the fiscal response from our government has been the strongest in the G20.

Tuesday night would have been Budget night and Treasurer Josh Frydenberg would have been announcing a budget surplus. But, COVID intervened. There was no budget announcement, and any surpluses have now gone – sacrificed to support Australian households, businesses and jobs.

This year, the Treasurers customary budget speech was replaced with a statement to Parliament on the economic impact of the COVID-19 crisis in which he reiterated that the “best way to pay back debt is through productivity enhancing reforms focussed on workforce training and education, infrastructure, cutting red tape, taxation and industrial relations reform”. We expect that a reinvigorated economic reform agenda will likely be the key focus of the October Budget.

Whilst updated numbers will be provided in June, as mentioned previously Australia’s deficit is expected to peak at around $200bn (2020-21), or around 10% of GDP which will be the highest since the end of WW2. This will see net public debt nearly double as a percentage of GDP over the next few years.

So, Can we afford it?

Economist, Shane Oliver has explored the coming deficit and public debt surge. With the inclusion of his own projections he explains that whilst not ideal, it is affordable based on five key principles:

1. Australia could not afford the alternative.
2. It makes sense for the public sector to borrow from households and businesses (metaphorically) at a time when they are stuck at home and can’t (or won’t) spend due to the shutdown.
3. The support programs have been designed to support the economy when they are most likely needed in the June and September quarters and to phase down thereafter.
4. Australia’s net public debt is relatively low and there is far greater scope for fiscal stimulus than other comparable countries.
5. The cost of borrowing for the Federal Government is very low at just 0.25% for three years and 0.95% for ten years.

Read more here >>

The following, a ‘crisis risk dashboard’ helps to further explain where Australia sits compared with other advanced economies around the world.

Italy — with high debt, a lot of bad loans and weak governance — stands out. Spain has similar problems with debt. Canada isn’t quite in the same category, but high debt and elevated house prices are a concern. Australia fairs well across all categories excepting exchange rate risk and 2Y Bid/Ask spread.

As many of you would be aware, FinSec are specialist UK Pension advisers.

Whilst COVID-19 is wreaking havoc on just about every area of our lives, from a transfer perspective it has created the perfect environment for moving a UK pension to Australia.

• For defined benefit schemes we are experiencing significantly higher transfer values – 20X to 50X annual pension, when normally values are around 10X to 20X.This is a product of low UK Gilt Rates (UK government bond rates) – Low rates lead to higher transfer values (CETV) and right now the rates can’t get much lower.
• Optimal exchange rates – A good exchange rate (UK to Aus) means more money on conversion, and;
• Global investment markets are at record lows – When markets fall, it presents opportunities to invest money (in this case a pension) when prices are cheaper.

Whilst there are significant eligibility rules to consider, there has never been a better time for UK migrants and returning expats to consider their position. We would be delighted if you could please share this message with any relevant person/s you believe could benefit from the information. Our dedicated website on the subject can be found at www.finsecptx.com.au.

COVID-19 for all it’s detriment has brought the frantic pace of our lives to a screeching halt. We have had time to reflect on the importance of our health, the privilege of being employed and to be more mindful of those around us. The below quote is one we have often shared in the past, however for many it will now hold a far more powerful meaning.

Last but not least an important reminder about cyber security. Forced to conduct life remotely has seen the community radically change their approach to collaboration and productivity. We have had no choice but to rapidly take up the use of new technologies and increase our digital footprints. Unfortunately, this new way of doing things comes with specific cyber security risks, including targeted cybercrime. We emplore you to please stay diligent when it comes to your cyber security. Some simple but effective steps include:

• Exercise critical thinking and vigilance when you receive phone calls, messages and emails.
• Exercise caution in opening messages, attachments, or clicking on links from unknown senders.
• Be wary of any requests for personal details, passwords or bank details, particularly if the message conveys a sense of urgency.
• If in any doubt of the communicator’s identity, delay any immediate action. Re-establish communication later using contact methods that you have sourced yourself.