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

Energy policy must prioritise the economy

Halving super drawdowns helps wealthy retirees most

US rate rises would challenge multi-asset diversified portfolios

banner

Most viewed in recent weeks

Why spending more in early retirement can improve lifetime income

Conventional wisdom encourages retirees to preserve superannuation. But if those likely to qualify for the Age Pension later in life spend a little more today, it may deliver higher lifetime income and a more stable retirement.

Testamentary trusts have secured the CGT exemption

Treasury’s latest CGT reform draft delivers a win for testamentary trusts and deceased estates, exempting estate-derived gains from the 30% floor. However, questions on death and divorce rollovers remain unresolved.

Meg on SMSFs: What do we think about reversionary pensions these days?

Reversionary pensions have long been a staple of SMSF estate planning, but are they still the best option? Meg Heffron revisits a once-clear favourite and asks whether changing super rules have shifted the balance.

Is it time to bail on Australian stocks?

For generations, Australian investors have backed banks, miners and dividends. But has that loyalty come at a cost? A look at the numbers raises an uncomfortable question about where future returns will come from.

How does the 4% rule stack up?

The 4% rule has long been retirement's gold standard. But after a difficult period for investors, fresh analysis suggests a more conservative approach may significantly improve the chances of making savings last.

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

Latest Updates

Planning

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

Superannuation

There's a reason why your super is locked up until your 60s

For decades, it seemed settled. Then one controversial idea reignited a debate that could reshape the financial future of millions. The real question isn’t who’s right or wrong, but whether a long-held assumption deserves another look.

Property

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Retirement

Under-retiring: The greatest retirement risk in a generation

Two retirees. Similar savings. Completely different lives. New research from Challenger reveals why some Australians confidently spend in retirement while others hold back and the overlooked factor shaping retirement decisions.

Five risks to watch in markets

Things you may often hear are: a recession is around the corner, markets are overpriced, the AI sector is about to flop at any moment. It’s like the never-ending laundry pile that sits in my house, it never really disappears.

Investment strategies

Do you qualify as ‘rich’?

What does it mean to be 'rich'? For something so universally desired, it is surprisingly difficult to define. That ambiguity creates a challenge for investors and raises a bigger question about what financial success really looks like.

Investment strategies

If you’re worried about your bond portfolio, you’re missing the point

Most investors think they know what bonds are for. But when markets turn volatile, a surprising misunderstanding can lead to costly decisions. Here’s the overlooked lesson that could change how you view your portfolio.

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 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.