Yesterday afternoon the government announced details of its planned wage subsidy package, and to describe it as massive would be vastly understating the size of the plan. We have seen wage subsidies announced in countries such as Canada and the United Kingdom and have been hoping to see a similar plan announced in Australia.
Australia stands in the very fortunate position of having largely run a balanced budget in recent times and has considerable available ammunition when compared to other developed economies. Unlike the GFC which was an evolving crisis and involved policymakers reacting progressively to negative developments, the economic impact of the coronavirus pandemic is far easier to calculate and ultimately policymakers know that when the outbreak is contained and/or a vaccine is released, most companies will be able to restart and rebuild. Therefore, it is pleasing to see policymakers in Australia being proactive and throwing arguably more money than needed at the problem because the consequences of doing too little could lead to a protracted recession beyond when the health crisis abates.
In summary, the wage subsidies will cost the Australian government a whopping $130bn over the next six months and brings the total fiscal stimulus/rescue spending to roughly 16% of GDP. The package will explicitly target Australian companies that have seen a significant impact to their revenues – 30% for those businesses with less than $1bn of annual turnover and 50% for those businesses with more than $1bn of annual turnover – and will effectively cover $1500 per fortnight of each employee costs for those businesses. This will allow affected companies to retain (or rehire) staff throughout the next six months, with the plan intending to keep unemployment constrained until such time that the economy begins to recover. According to the government, these payments will apply to up to six million employees throughout Australia and in our view gives the economy an excellent chance at withstanding the temporary yet considerable shock over the next six months.
What impact will this have on the stock market? As this package was released towards the end of the trading day yesterday, we saw a very big spike in buying and I don’t think this is misplaced. Ultimately, it’s impossible to know how the economy will fare without knowing how successful the government’s policy approach to handling the outbreak is. There are early signs that the measures taken in Australia are starting to have an impact without having Australians endure the more draconian measures adopted by other developed economies in Europe. Hopefully, that progress continues but I think it would be very helpful to know what the government plan is for when infection numbers are contained. We have seen very effective measures adopted in South Korea which has managed to keep its economy ticking over despite the threat of infections spiking, primarily with vast testing rates (the highest rate per capita in the world) and contact tracing (which effectively means tracking down those in contact with any new infected people). It would take some money to build up these capabilities but considering the government has now spent over $200bn, I think this would be a drop in the ocean.
So, with the view that Australia has an opportunity to have the outbreak controlled more effectively than most other countries, it’s hard not to be optimistic about the effects this new wage subsidy plan will have. I remain concerned about the impact of the pandemic in the U.S. which has been very slow to respond, and which is now enduring the worst infection trends of all developed countries and am therefore wary of holding too much exposure to U.S.-facing companies. Rivkin’s strategies’ individual holdings are primarily exposed to China or Australia so overall, we remain very comfortable with our positioning throughout this difficult time.
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