We have done our thorough research following recent developments of COVID-19, as well as the latest rate cut from the RBA to lowest level in our history to 0.25%.
What does it mean for the AU stock market, and more importantly what does it mean for the banking and property market?
First we look at their weighting of ASX200 (We discount All Ordinary Index as they include zombie companies).
As of March 20th, 2020, the weighting of the big 5 banks in Australia in the ASX200 is 20.22%, and the weighting of AU Financials sector is 26.95%. The point is, AU Financials is a big factor in AU Economy.
These are the top Weightings in ASX200. (90.82%):
AU Financials 26.95% (big 5 banks = 20.22%)
AU Materials 18.87%
Consumers (both) 6.22% and 7.5%
Healthcare 12.89%
AU Industrials 7.56%
Real Estate 6.99%
Energy 3.79%
Our point is Banking and Property make up nearly 34% or 1/3 of the market. If you add Materials, the make up then will be 52.81%.
Now let's look at AU GDP growth.
As you can see here, it is slowing down over the last 7-10 year long-term trend, and well below the average of 3.5%.
Now let's look at the biggest contributor of the Index, Financials (Banks)
How do banks make money? Well it's obvious that they borrow money from you and lend money out at a higher rate. The difference is the banks' profit (We discount operations and other admin costs for now). For example, one of their funding sources is Term deposit. What is is offering now? Do shop around though but we can see it ranges from 1-1.5% pa. What product has been the most profitable to the big banks recently? I'm sure you get this one right, mortgage.
How much is the new mortgage rate? 2.5 - 3.5 %. Bank profit?
Now let's look at the other side of the equation, who has mortgages? property owners? Can they decide not to pay their mortgage if they lose jobs?
Well it will become 2008-2009 if we don't get this right.
Now let's look at AU Trading partners
According to DFAT - 73% of Australia Trade is with countries in the APEC Group
Now let's look at the current Virus Tracker
The top 5 trading partners are China, Japan, USA and the Republic of Korea. But looking at the chart above, the global economy is facing the biggest challenge since the modern globalisation to date.
Now looking at the China - manufacturing economy and what does the below tell us?
What does it mean? It will trickle down, with more and more businesses or companies will close. Australia's well-known services are education, tourism, professional and financial services.
But with those factors hovering above in the economic cloud, the prosperity climate doesn't look too promising.
How much have the major bank stocks dropped in 6 months? The banks are trying with various plans to hold on to their assets, and stay afloat. Whether they are quick and efficient enough is a great question.
What does it mean for the overall economy?
You have to go back to Dec 2013 to find some comfort.
The last time the global economy was in the step decline was back in September/October 2008. What happens when the economy is in recession? People will lose jobs and had to sell their homes/assets to pay back their liabilities.
Let's see the impact of the last recession in the US. Look at below charts for US stocks vs US property prices where you see the impact on US house prices between 2007-2012.
Now let's look at Australia
Whether the Governments around the world can get together and use their monetary and fiscal tools to help the economy is a great question.
Looking back to the last GFC, we can learn the lessons and take our own approach.
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Disclaimer: This is for illustration purpose only. The information is publicly available* and we extract from those sources. Any information in this example does not constitute or formulate any investment advice. We do not take into your account your personal financial circumstances, objectives or needs, and this should be viewed as General advice/Information only. You should, before acting on the advice, consider the appropriateness of the advice.
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