Equities could see rapid recovery next year
Australian equities could see a “reasonably rapid” recovery in 2021 even if the current situation is looking dire, according to an investment research firm.
In its April Australian economic update, Morningstar said that, despite the grim economic outlook, it believes the Australian equities market will not stay down in the long term.
Between mid-February and late March, Australian shares have dropped sharply, with the S&P/ASX 200 Index down by 17.9 per cent in capital value and 16.9 per cent in total returns year-to-date.
“In current conditions, point forecasts remain highly speculative, but the current view is that there will be a V-shaped recovery, with quite a sharp fall in activity this year followed by a reasonably rapid recovery next year,” Morningstar said.
“The International Monetary Fund, for example, expects that the Australian economy will shrink by 6.7 per cent this year, followed by 6.1 per cent growth in 2021.”
Morningstar noted, however, that it believes unemployment would still be “markedly higher in 2021” despite the optimistic outlook.
It said the unemployment rate would be around 8.9 per cent in 2021 as compared to the 5.2 per cent rate seen in March before the pandemic began.
“Business conditions even on a relatively optimistic assessment are likely to remain difficult for the rest of this year, despite substantial fiscal support,” Morningstar said.
Morningstar said that, even with the federal government’s JobKeeper wage subsidy scheme keeping the unemployment rate down for the June quarter, it will still end up reaching 10 per cent.
“In these difficult conditions, there will be unsavable casualties like Virgin Australia, for example, who had just gone into voluntary administration at the time of writing [the report],” Morningstar said.
“In time, the equity market will start factoring in a 2021 turnaround, but the coming few months are more likely to see it having to absorb a stream of very poor news.”