The Wrap: Lockdowns, Pathology & Automotive

Weekly Reports | Jul 02 2021

Weekly Broker Wrap: lockdowns and covid-19; pathology; Australian dollar; and motor dealers

-Sydney lockdown unlikely to reduce the magnitude of consumer expenditure
-Whether the UK re-opened prematurely hinges on hospitalisations/deaths
-Support for pathology stocks from the pandemic likely to continue through 2021
-Australian dollar rally sensitive to more hawkish commentary from central banks
-Motor vehicle supply shortages unlikely to be resolved quickly


By Eva Brocklehurst

Covid-19 & Oz Lockdowns

Lockdowns are obviously needed, JPMorgan suggests, and more so if the spread of the virus persists, yet so far the broker does not believe there is sufficient reason to shift short-term GDP forecasts on the back of the Melbourne lockdown in May and the current one in Sydney.

JPMorgan has long expected the withdrawal of government support would mean GDP growth will drop a few notches, yet notes there are limits on how much expenditure should slow given the elevated savings rate. At this stage there is not enough information to show that these lockdowns will reduce the magnitude of expenditure, rather it is likely to be just redistributed.

NSW represents around one third of Australia's economic activity, Morgan Stanley notes, of which greater Sydney takes up three quarters. The direct economic impact of this lockdown is estimated to be around -$2bn, or -0.1% of annual GDP for the state.

While the broker notes there have been limited impacts on other states in prior lockdowns, and the areas under restriction has bounced back relatively rapidly, there are several differences this time.

The cluster in Sydney involves the more infectious delta variant which increases the chance that cases have spread to other states, and highlights the difficulty of returning to a zero covid environment.

There is also less support from the federal government, although it has introduced a one-off payment to individuals affected by an extended lockdown and NSW is likely to introduce a business support measures. This is still smaller than the suite of measures previously available.

Mobility, which JPMorgan assesses is the most immediately measurable effect of restrictions on activity, is a less useful guide to economic outcomes. Some spending segments which did particularly well during initial lockdowns in 2020, such as hardware and electronics retailing, sustained their performances for a little longer after mobility was restored.

The broker believes the reason was the accompanying government income support was not spent immediately. As the savings rate remains high there is probably some capacity for more expenditure in this regard.

Economic variables that move positively with mobility, such as restaurant bookings, tend to do so for fundamental reasons involving personal consumption and have a more stable relationship with mobility. At this point household preferences for expenditure appear to matter just as much as mobility, the broker concludes.

Meanwhile, vaccine take-up in Australia is low with around 25% of the population receiving at least one dose and only 5% two doses. As a result, Morgan Stanley suggests hedging is prudent for portfolio positioning and has added a quality tilt to its value bias.

Covid-19 Globally

Globally, JPMorgan notes localised European lockdowns this year have not delivered the equivalent damage to GDP caused by the 2020 shock. Oxford Economics points out new global cases of coronavirus have fallen below the March lows and rapid vaccination programs have allowed economies to re-open.

Nevertheless, despite leading the way in vaccinations within the G20, the UK has experienced a sharp rise in cases and now has the third highest number of cases per million in the G20. Still, hospitalisations are low so recent developments are not an automatic alarm bell.

Whether UK made a mistake re-opening prematurely will hinge on what happens to hospitalisation and deaths, the analysts suggest. But the rise in cases does highlight the risk of variants that trigger further surges in coronavirus in those economies that are made limited progress with vaccines.

Oxford Economics makes two points. Although the combination of vaccine and restrictions on mobility can keep the number of cases low, reducing these to very low levels is easier said than done.

Secondly, high vaccination rates are not a guarantee of a smooth path to normality. Israel is a case in point where its vaccination program has been a game-changer but in response to a sharp increase in case numbers the country has been forced to reimpose the use of masks in public indoor areas.


Jarden finds forecasts for FY21 for the pathology stocks Sonic Healthcare ((SHL)), Healius ((HLS)) and Integral Diagnostics ((IDX)) are complicated by the stop/start nature of lockdowns across Australian states.

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