It is now clear that with social distancing and the current lockdown we have an interim mechanism, until there is a vaccine, to avert a catastrophic health crisis and collapse of the health system. It means that we quickly move on to the next phase of finding the optimal balance between the economic and health impacts. I find that amazing given the nations prospects just 4 or 5 weeks ago. It highlights just how dynamic and unique this situation is and how well its been dealt with on all fronts here in Australia.
At its core, the decisions that need to be made next by government are not about assets or lives, but something more fragile and far more important, and that is the systems upon which they are built. So, while many will argue whether we should prioritise lives over the economy or the economy over lives, I think they have their priorities wrong. The priority of government in these times must be to preserve the integrity of the systems themselves that are fundamental to the future of our nation. Macro not micro.
What that means in practical terms is that once the health system has been stabilised and the coronavirus relatively contained, the government will move to reopen the economy up to the point that is required to stabilise it. It will likely mean releasing the lockdown valve enough to enable the economy to restart, but not to the point that we let the health system become overwhelmed. It will probably mean living with a higher level of new cases in the virus than we see now. A balance will be found.
Although the economy is not fully reopening until a vaccine is available, it will likely be progressively reopened or at least moved between higher and lower lockdown levels for months at a time. I think the most likely scenario to evolve will be one where we alternate between say 2 months of lock down followed by 2 months of lower restrictions before reverting to lockdown again, if required. Any increased economic activity that isn’t from government spending will be a significant and real bonus in the interim.
While all of this is good news, I still think the next month or so will be quite difficult for general sentiment as bad economic figures come out at the same time as people start to feel the impact of the slowing economy on their daily lives. The economic data will continue to generate headlines as the worst figures since the Great Depression. It will be worth remembering that we know the government is committed to borrowing huge amounts to ensure we get through the next 12 months and we know there is a vaccine coming soon.
I remain optimistic on the 12-month view and genuinely believe that the economy will bounce back quite quickly, post vaccine. However, it is difficult to know how bad the economic news will be in the very short term and any negative surprises will not be well received by the market. This will present opportunities. While we have commenced buying modest amounts of specific companies this month, we are taking a conservative approach, and will continue to do so in several tranches over the coming weeks and months.