Escalating US-China tensions threaten the share market recovery

President Trump’s declining prospects for re-election and President Xi’s effort to deflect blame for the health and economic disaster produced by coronavirus look likely to lead to escalating tensions that may well undermine the significant stock market recovery of the past month engineered by central banks worldwide.

Many countries, including Australia, are looking for answers as to whether the global coronavirus crisis could have been avoided with more timely and honest disclosure by China. Outside of Chinese propaganda, few question that the virus originated in Wuhan.

President Trump is widely reported to be discussing a range of retaliatory measures against China over its mismanagement of the coronavirus. He has suggested that he would reimpose tariffs that had been removed as a part of the “phase one” trade deal with Beijing. Administration officials have also reportedly discussed more dramatic moves such as cancelling the roughly $1 trillion in U.S. debt held by China. That’s unlikely as it would destroy the full faith and credit of the U.S. and could make this economic crisis an order of magnitude worse.

With a presidential election in early November, there are certainly powerful political incentives for the White House to act against China, even though it will be hard for the U.S. to come up with measures that don’t do more harm than good to U.S. interests. Punishment for the sake of punishment is not a sensible strategy but Trump may see things differently. You would expect any retaliatory moves by the U.S. to be measures it already wanted or intended to implement anyway, though political considerations may lead to politically motivated escalation and President Xi does not look like giving any ground.

Some challenges and likely changes as a result of coronavirus

  • Finding the balance between lockdown and an open society. There is an optimal balance in response to a pandemic that is somewhere between the two extremes of “total lockdown” and “totally open society.”Unfortunately, we don’t know where the appropriate balance is. Were lockdowns necessary to stop the spread of the coronavirus? From a scientific perspective, this is unanswerable because there have been no consistent control (no lockdown) and experimental (total lockdown) groups. Those believing the worst-case scenario COVID-19 models that predicted hundreds of thousands or millions of deaths will say that lockdowns and extreme social distancing have prevented a complete catastrophe. Those who do not believe the worst-case scenario was inevitable without a lockdown will claim that the models were exaggerated or, at the very least, that the ends did not justify the means. This is the argument advanced by those favouring the Swedish approach over Australia’s approach. It may be several years, if ever, before we have enough evidence for a consensus to develop as to which approach produced the best outcome but this is a very important question that will influence public policy in the future.
  • Politicians vs Scientific & Medical experts. Putting the recommendations of scientists, public health officials and academics into practice often clashes with political realities. Whenever there is a crisis, there is a strong tendency to turn toward experts or technocrats for solutions. The trouble with experts is that they often struggle to place their important work into a bigger picture. In this case, those favouring harsh lockdowns claimed to be “following the science.” However, “the science” does not provide unambiguous guidance. For instance, there is good reason to believe that there may never be a particularly effective vaccine against COVID-19. Additionally, there are other factors than science involved in a government’s response to a pandemic, such as legal, ethical and economic considerations. Allowing any one factor to dominate policymaking can produce an undesirable outcome. Rightly or wrongly, in this case, many in the public will perceive that the science factor was prioritized, to such an extent that economic health was subordinated to public health. Personally, perhaps because I am a baby-boomer and have an elderly mother, I favour this approach but I recognise the dilemma.
  • The benefits of greater self-reliance. Following coronavirus there will be tremendous pressure on governments to create national stockpiles of vital materials, create redundancies in their supply chains and be more self-sufficient wherever possible. That will require onshoring some manufacturing capabilities that are deemed vital to the national interest. This fits into an existing debate as to whether we should less enthusiastically embrace globalisation.
  • We must face the price of life-or-death trade-offs. When government evaluates the pros and cons of their proposed actions, they often do so through the lens of opportunity cost. Resources are limited, and each action comes at a cost. Often, the best way to measure these costs is to first convert whatever is being measured into dollars and cents. This can even be done with human health and life itself. Many people say that one cannot put a price tag on human life. This is true from a moral or philosophical perspective. One way that society is wrestling with that question is by comparing the costs of the lockdown (the decrease in gross domestic product) to its benefits (the economic value of the lives saved). A less dramatic example is the Australian debate regarding how much financial support should be given to temporary residents.

Australian Banks under pressure

In response to coronavirus uncertainties, both ANZ & Westpac have recently “deferred” their scheduled half-year dividends and NAB reduced its half-year dividend from $0.83 to $0.30. The deferred dividends ($0.80 per share for both ANZ & WBC in 2019) may not be paid at all. Underlying earnings were sound but loss provisions have been substantially increased reflecting expected business loan losses. There is a strong probability that bank dividends will be well below historic levels for the next year and potentially longer, depending on how severe the economic downturn proves to be. Slower economic growth, high consumer debt levels and low-interest rates had already hurt bank earnings and these factors are likely to continue when we emerge from coronavirus. The loss of dividend income was certainly not expected as recently as a few months ago and once again highlights the danger of having too much reliance on any one company or sector.

How long Will a Vaccine Really Take

This recent article in the New York Times entitled “How long Will a Vaccine Really Take?” provides some interesting information on the challenge to find an effective and safe vaccine and how long they may well take.

Reduced Minimum Payments for Income Streams (private pensions)

The Government is allowing persons in pension mode from their personal superannuation to reduce how much they withdraw if they wish to do so. The 50% reduction in minimum payments required will apply for 2019/20 and 2020/21. For persons under age 65 at the start of the financial year, the new minimum is 2.0%, for those between 65 and 74 it is 2.5%. Higher minimums apply to older people.

Early Access to Super

Applications to withdraw up to $10,000 in 2109/20 and in 2020/21 should be made to the ATO via your MyGov website. There are some eligibility criteria, such as eligibility for JobSeeker or working hours reduced 20% or more. Careful consideration should be given to the long-term consequences for your retirement of making early withdrawals so no-one should withdraw any funds unless really necessary.

Deeming Rates for Centrelink Age Pensions

From Friday 1 May 2020, the social security deeming rates that apply to savings accounts, term deposits, managed funds, shares and some other financial assets have been reduced to better reflect what people are typically earning. This reduction will increase pension payments modestly for many who are subject to the income test.

The old and new rates are as follows:

Former RatesFrom 1 May 2020
Lower rate: up to $51,800 for singles and $86,200 for couples1.0 %0.25%
Upper rate: amounts above to $51,800 for singles and $86,200 for couples3.0 %2.25%

Any increase to pensions and allowances as a result of the changes are calculated and applied automatically.

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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