Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 356

Post Covid, the risks are skewed to the downside

When it comes to the Covid-19 crisis, if we have learnt anything amid the plethora of commentary from an army of ‘experts’ across a plurality of disciplines, it is just how much we don’t know.

To paraphrase former US defence secretary, Donald Rumsfeld, not only are there a lot of ‘known unknowns’ but by definition incalculable ‘unknown unknowns’.

The reality of making Covid-19 forecasts

Economic and financial developments, and more importantly economic and financial forecasts, should be understood in that context. Put simply, the current circumstance is one for which there is little precedent and forecasting, which is fraught at the best of times, and especially so now.

On the economic consequences, it is safe to say that the ‘base case’ is probably the worst we have confronted since the Great Depression. But the distribution of possible outcomes is immensely large, and, in my view, skewed to the downside.

In the Australian context, that much has been asserted by our most senior econocrats, including RBA Governor Philip Lowe and Treasury Secretary Steven Kennedy. They have both articulated scenarios encompassing falls in GDP of greater than 10% and an unemployment rate running well into double digits.

In fact, the impact may be bigger on Australia than other developed economies.

Australia is a medium-sized open economy dependent on a smoothly functioning international trading environment and was already under some stress before the onset of the crisis. To date, population growth (aided by an influx of overseas students and tourists) has underpinned Australia’s enviable growth record, but population growth is set take a considerable hit and recovery from this is likely to be slow. Offsetting this may be the recent realisation of Australia’s relative success in preventing the spread of Covid-19.)

Globally, however, financial asset prices seem to imply that investors are quite sanguine about the outlook. Markets are implying that the bounce back will be well under way by the fourth quarter of 2020 and will be ‘V’ shaped rather than a ‘bath-tub U’ or, worse still, an ‘L’ shape.

In the US, the S&P500 is some 28% off its lows of 23 March and ‘only’ 15% shy of its peak in February. It is currently trading at around levels seen in early June 2019, a time when some analysts were questioning whether the market then was ‘stretched’.

In Australia the S&P/ASX200 is about 20% off its lows and still some 25% from its February peak, reflecting, inter alia, the high weighting of bank stocks in the Australian market.

Why are markets so sanguine?

Financial markets are drawing an extraordinary degree of comfort from the stimulus packages from governments and central banks. These packages go well beyond anything contemplated during the GFC. Both the Fed and the ECB are buying private sector debt (including ‘junk’ bonds) to support those markets, while locally the RBA has undertaken quantitative easing (QE) measures.

On the fiscal side, there have been extraordinarily large packages put together, including Australia’s at a little over 10% of GDP.

But are markets drawing too much comfort?

Arguably risks were weighted to the downside before the Covid-19 crisis. Not only were trade tensions already elevated, but global politics were dysfunctional. The US was characterised by ‘gridlock’ and a polarising presidential campaign. In Germany, Angela Merkel was in government but not power, and China had a Hong Kong problem.

Geopolitical tensions were rising (witness US/China tensions, a cyber ‘Cold War’ and ongoing turmoil in the Middle East). Governments were wrestling with deep-seated structural issues such as climate change, inequality and ‘oligopolisation’.

And this at a time when monetary policy, as we conventionally understood it, was exhausted, and the efficacy of any future stimulus was doubtful. Similar doubts attach to the monetary policy innovations instituted since the onset of the crisis.

Investors must also contemplate potential longer-term pitfalls relating to exit strategies from extraordinary stimulus. What, for instance, are the consequences of Fed and ECB purchases of private sector debt?

It was a build-up in non-financial leverage (i.e. debt) that tipped the world into the GFC. In the period since, not only has corporate debt increased but its quality has deteriorated, and the stakes just got higher with Fed and ECB purchases of private debt. The ‘moral hazard’ issues attaching to those measures loom large.

There are misgivings too about the potential for monetary financing of budget deficits—a type of ‘modern monetary theory’ in its most extreme form—and the potential longer-term inflationary, or perhaps stagflationary, consequences of such measures.

Caution is warranted and will be for some time. Despite the signs that authorities are on top of the spread of Covid-19, the ‘unknowns’ loom large, particularly in the post-lockdown period and with the negative economic consequences potentially underrated.

The first principle of investing is diversification, and now is a good time to remind ourselves of the virtues of that principle.

 

Stephen Miller is an Investment Adviser with GSFM. This article is general information and does not consider the circumstances of any investor.

 

  •   6 May 2020
  • 1
  •      
  •   

RELATED ARTICLES

Halving super drawdowns helps wealthy retirees most

US rate rises would challenge multi-asset diversified portfolios

A tale of the inflation genie, the Fed and the RBA

banner

Most viewed in recent weeks

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

Family trusts: Are they still worth it?

Family trusts remain a core structure for wealth management, but rising ATO scrutiny and complex compliance raise questions about their ongoing value. Are the benefits still worth the administrative burden?

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Latest Updates

Investment strategies

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

Property

The housing market is heading into choppy waters

With rates on hold and housing demand strong, lenders are pushing boundaries. As risky products return, borrowers should be cautious and not let clever marketing cloud their judgment.

Investment strategies

Dumb money triumphant

One sign of today's speculative market froth is that retail investors are winning, and winning big. It bears remarkable similarities to 1929 and 1999, and this story may not have a happy ending either.

Retirement

Can the sequence of investment returns ruin retirement?

Retirement outcomes aren’t just about average returns. The sequence of returns, good or bad, can dramatically shape how long super lasts. Understanding sequencing risk is key to managing longevity risk.

Strategy

How AI is changing search and what it means for Google

The use of generative AI in search is on the rise and has profound implications for search engines like Google, as well as for companies that rely on clicks to make sales.

Survey: Getting to know you, and your thoughts on Firstlinks

We’d love to get to know more about our readers, hear your thoughts on Firstlinks and see how we can make it better for you. Please complete this short survey, and have your say.

Investment strategies

A framework for understanding the AI investment boom

Technological leaps - from air travel to computing - has enriched society but squeezed margins. As AI accelerates, investors must separate progress from profitability to avoid repeating past mistakes.

Economy

The mystery behind modern spending choices

Today’s consumers are walking contradictions - craving simplicity in an age of abundance, privacy in a public world. These tensions tell a bigger story about what people truly value and why.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.