Australia likely to enter recession

As Australia is likely to enter a recession for the first time since 1991, according to UBS’ global economists’ severe pandemic scenario, investors should position themselves for the coming events. 

With COVID-19 already impacting the markets around the word, UBS said in a note that it had moved overweight infrastructure stocks with defensive dividends, consumer staples and real estate investment trusts (REITs) and increased its negative position in other financials to reflect ‘lower for even longer’ interest rates.  

“We also still think investors should position for growth over value. The recent sell-off has demonstrated that the market remains willing to pay-up for companies with genuine defensive growth opportunities, with PE dispersions now at record highs,” the note said. 

According to UBS’ economists, Australia would enter a ‘technical recession’, with unemployment rising to 8% under a severe pandemic scenario and two negative quarters of gross domestic product (GDP) in 1H-20.  

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“Given daily developments, our economists now see the risks for Australia as already rapidly shifting towards the downside scenarios, and potentially even worse given unexpected shutdowns. Our global economists now see the economic slowdown as likely to exceed the severe pandemic scenario,” the firm warned. 

“With the very significant disruption to labour markets, we see employment growth flatlining in coming quarters, seeing the unemployment rate increase significantly to 6.25% by the end of the year. This stops the boom in home prices, with growth revised down to 5% ahead (was 10-12%), with system credit growth steadying around 2.5% year on year.” 

As far as COVID-19 scenarios were concerned, UBS economists presented three scenarios which included new forecasts, intermediate pandemic case and a severe pandemic scenario.