Yahoo Finance Just how bad will a second wave of Covid-19 be for Aussie stocks?
The biggest threat to the global stock markets aren’t financial, business-related or economic: it’s health-related, experts have said.
According to AMP Capital chief economist Shane Oliver, the biggest risk currently facing equity markets are a “serious second wave of coronavirus cases in major developed countries”.
Over the last week, 20 US states saw a rise in new cases and a fresh outbreak was reported in Beijing, China. We also saw new cases in Australia, primarily in Victoria.
“These second wave concerns have come at a time when share markets had become vulnerable to a pullback after huge rallies since the coronavirus panic low,” Oliver said.
Following major dips in the stock market associated with recessions, it’s common for shares to surge up, get overbought, then pull back amid fresh recession fears, he added.
Markets then shake off the excess, and then continue rising.
“Second wave virus concerns and fears it may result in a renewed lockdown and double dip in economies looks to have triggered the pullback over the last week,” Oliver said.
“But the question is whether it’s just a correction in a rising trend, or will it turn into another big leg down in shares? A key determinant could be how serious any second wave is.”
So how likely will we be seeing another significant coronavirus-triggered share market downturn?
‘Very vulnerable’
Australia will be hard-hit by a global second wave, according to BetaShares chief economist David Bassanese.
“Australia’s equity market... remains very vulnerable to a return to global economic lockdowns that could arise from a second wave of coronavirus cases,” he told Yahoo Finance.
The world has seen four pandemics since 1918, and all four have had second waves, he said.
“So chances are high that we’ll see an upsurge in cases in at least one major economic region over the next few months.”
However, the problem isn’t whether or not there will be a second wave, but whether we can handle it without resorting back to business shutdowns, he said
“It's the threat of lockdowns, not the upsurge in cases per se, that is the real risk for equity markets.”
‘Too hard and too fast’
According to CommSec senior economist Ryan Felsman, the Australian sharemarket will likely see another dip.
“It’s run too hard and too fast,” he told Yahoo Finance.
“Valuations remain stretched, the sustainability of dividends are questionable and earnings are incredibly weak due to the economic contraction.”
Globally, Australian is seen as a virus ‘safe haven’, but the real test will come during the August reporting season, he added.
“The global backdrop is still challenging with the fragile economic recovery (likely muddle through rather than ‘V’ shaped recovery), virus outbreaks and US political uncertainty growing in the lead up to the presidential election,” Felsman added.
“Wall Street is increasingly pricing in a Joe Biden victory – and he may plan to lift corporate tax rates (due to growing concerns about inequality) – which may impact earnings.”
Wall Street: Is the worst behind us?
According to Oliver, America is more susceptible to a second wave of cases since restrictions lifted relatively early, and many states moved ahead with reopening against the federal government’s own medical advice.
Overall, the US is seeing a flattening of coronavirus cases: numbers in the northeastern states are falling, while southern states are seeing a rising trend, offsetting one another.
So even if we see a second wave, the stock market fallout won’t be as bad as the first time, Oliver said.
“However, provided any second wave is relatively mild in terms of pressure on health systems and the number of deaths, it's unlikely to reap the havoc seen back in March.
“Our base case remains that the pullback in shares over the last week is part of a correction in a broader rising trend.”
It comes down to how well a country’s health system can handle a new outbreak – but this doesn’t bode well for the US.
“While some Asian countries appear to have infrastructure in place to rapidly detect, trace and isolate those with new infections, this is less clear in the global economy’s most important country – the United States,” Bassanese said.
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