S&P/ASX 200 hits record daily close of 7179.5 amid vaccine optimism

The S&P/ASX 200 closed at a new daily record on Friday. Picture: Joel Carrett

The Australian sharemarket struck a record high on Friday as economists saw silver linings in Victoria’s Covid-19 outbreak and iron ore miners rebounded after recent jitters about a retreat in prices.

The S&P/ASX 200 share index closed up 85 points or 1.2 per cent at a record close of 7179.5 points, after hitting an intraday high of 7186.8 earlier in the day.

The all-time high of 7197.2 points was set on February 20, 2020.

While it may be hard to convince Victorians thrown back into lockdown this week that something good may come of the latest Covid outbreak, economists said it could boost vaccination rates, reducing the need for subsequent lockdowns and lost economic activity.

About 15 per cent of Australia’s population have received Covid-19 vaccine doses but only about 2 per cent are fully vaccinated. Victoria continues to lead the states with 23,625 injections given on Thursday and a record 123,871 doses given nationally.

The sharemarket was certainly putting an optimistic spin on the situation.

Perhaps encouraged by the fact that Victoria reported just four new cases of local transmission, “reopening stocks” whose earnings would be in the firing line of Victoria’s lockdown – including Webjet, Sydney Airport, Qantas, Transurban, Vicinity Centres and Bendigo Bank – were notable outperformers.

“A silver lining outcome to watch on the flip side will be vaccination take-up rates and potential to reverse hesitancy and complacency headwinds while increasing availability to cohorts, subject to supply constraints,” Morgan Stanley Australia equity strategist Chris Nicol said.

“This makes the vaccine rollout critical in calibrating timing scenarios that would see more open borders and less reactivity to virus transmission risks going forward.

“The Victorian development could be an important catalyst for more urgency and less hesitancy.”

But he maintained that “some hedging is prudent in portfolio positioning” in the sharemarket.

His team recently added a “quality tilt” to its “value bias” in Australian shares.

While noting a “tendency by market participants to discount economic risks from fresh lockdowns based on experience with prior short duration lockdowns”, Mr Nicol sees some “clear differences” in the current situation.

“Specifically, ‘crisis support’ has largely been removed, the variant (B. 1.617.1) at play appears to be transmitting more aggressively, contract tracing has identified a much wider cohort of risk exposure which is expected by authorities to grow, and mobility settings within state and cross-border are much more relaxed in the first instance,” he said. “Add to this a vaccination program well behind targets nationally and another cautionary phase presents while this health risk event unfolds.”

Goldman Sachs Australia chief economist Andrew Boak agreed that the outbreak was a “major risk”, but he noted that Australia’s success with a “near elimination” strategy provided some confidence that the outbreak in Victoria will be navigated successfully.

Mr Boak saw the potential for a “meaningful step-up in vaccine demand” as a “silver lining”.

He said some of his findings challenge the consensus thinking on the relative cost/benefit of an aggressive lockdown across economic, health and mobility dimensions.

He found that – so long as a near-elimination strategy is adopted early – there is no trade-off between economic/fiscal outcomes and health outcomes, beyond the very short-term.

Nations that saw the best health outcomes – measured by Covid deaths per capita – also tended to see the best economic outcomes, which contradicted the common view that policymakers needed to weigh up the benefit of stopping the spread of Covid against the cost to the economy.

Also, fast lockdowns could mean less time spent in lockdown, as well as better health outcomes.  Mr Boak found that countries that prioritised eliminating the virus tended to see both lower death rates and a more modest reduction in average mobility.

He said this largely reflected the success that hard and fast lockdowns could have in eliminating Covid from the community, which allowed mobility to normalise relatively quickly.

Additionally, he noted that the Australian economy had not suffered from the lack of international migration as much as earlier feared.

In his view, closing international borders has been positive for the domestic economy, boosting domestic tourism and consumption.

The ability of international students to commence their studies while overseas and the fact that many migrants and temporary visa holders chose to stay in Australia through the pandemic limited the impact on labour supply. Pre-pandemic, Australia was a net importer of tourism – worth about 1 percentage point of real GDP.

The subsequent inability to travel overseas coupled with Australians returning home in 2020 resulted in net travel exports adding 1 percentage point of real GDP growth.

Mr Boak said wage subsidies like JobKeeper could help smooth labour market fluctuations during both the lockdown and reopening phases.

He said house prices were more sensitive to interest rates than population growth.

He said it was likely that the relatively slow vaccine rollout in countries like Australia, New Zealand, South Korea and Japan was partly attributable to a generally favourable health backdrop, dampening any sense of urgency within governments to both secure and administer vaccines.

In contrast, per capita vaccination rates in countries such as the Britain and the US were about three-fold higher – probably a testament to the grave health situation.

“It is also possible that success eliminating the virus slows the vaccine rollout via the demand side – for example, in the event that the community assesses the risk of contracting the virus to be so low that it does not offset the risks of ‘complications’ from taking a vaccine,” he said.

“We remain open to this possibility and – on the flipside – would not be surprised to see a spike in vaccine demand over the coming weeks in response to heightened fears over the outbreak.

“On balance, we find the demand side argument to be somewhat less compelling than the supply side argument – ‘openness to take a COVID vaccine’ in Australia is on par with that in the US, even though the number of population-adjusted deaths in Australia has been far lower.”