We have never seen such a unique and rapidly changing situation as this before. There are periods in history that are analogous to what we now face, but nothing close enough to really provide a road map. Regardless, there are still key aspects of this event that stand out to me as especially important to consider. In this case unlike most economic disasters, where everyone wonders what will spark the turnaround, with this one we know – once the virus is gone everything reopens – that’s the spark for the turn around. We know it’s coming; it might be 6 months or 12 months but its coming. This aspect is unique, its good news and it should remain front of mind going forward.
Once the virus is gone, and events are back on and people are traveling again, the speed with which the economy bounces back will ultimately be determined by how well everyone deals with the next 6 months. From a Govt perspective the entire world really needs 6-12 months of bridging finance. That’s got to be the mentality. They need to go hard and go early. The Govt approach must be to do whatever it takes to get through that immediate window until we reopen. If they do that we will be in a good position once we get to the other side. As much as we have now seen announced by the Federal Govt, State Governments and the Reserve Bank, we will see more in the coming weeks and months. As Govts will all over the world.
As much as Govt can do, everyone in the community is going to take a haircut. I emphasize that because to put ourselves in the best position for 12 months’ time as a nation I believe the individuals and businesses most badly impacted are going to ask for, and get, short term concessions that 3 months ago would have been unthinkable. Now they are needed. Individuals and businesses will get temporary reductions in rent, reduced interest rates, deferments of interest payments and deferments tax payments. These measures will help in the next 6-12 months so that the economic impact, while harsh in the short term, will hopefully get us to the other side in without creating a long-term problem for the economy.
My biggest concern in the face of rapidly rising unemployment is the flow on effect to the banking system and in turn property prices. However, I am optimistic that the record low interest rates we have, and the short-term nature of a pandemic will provide the banks and property owners the tools to manage through the worst of it. I cannot emphasize enough that knowing there is a point at which everything reopens is a critical advantage over past economic downturns. It may mean that instead of foreclosing and forcing a sale the banks may be more likely to be flexible and provide either interest only payments or possible even interest to be deferred or capitalised for those who lose their jobs. It all matters.
While the economic consequences are ahead of us, the share market has already factored a lot of this in. That is why markets are down so quickly. Over the coming months as the bad economic news is released its critical to understand and remember this. It is all about “expectations” from here. Is the bad news what was now expected or is it better or worse than expected? The bad news won’t move markets as much as how that news aligns or doesn’t align with what is already factored in. It also means that share markets will also turn around well before the economy does. In the meantime, we remain busy being patient and waiting for the dust to settle as we look for opportunities.