Investment market update (for the quarter ended 31 July, 2020)
The US has struggled to contain a widespread outbreak across many states, with new outbreaks having also occurred in parts of Europe, the UK, Australia, and Japan.
While efforts to contain the pandemic have hit a number of sectors very hard, the massive monetary and fiscal response to fight the consequences of the virus have lifted many financial asset prices to all-time highs.
Still, the road to a full recovery will likely be long and difficult.
The widespread plunge in economic activity during the second quarter of the year, with US GDP growth dropping the largest amount ever for the three months to 30 June, indicates just how important the response from central banks and politicians will continue to be in the months and years ahead.
Unsurprisingly, the biggest hit to activity was a result of households reining in their personal consumption (outside groceries and alcohol), as lockdowns and business closures crippled discretionary spending.
Also, not surprisingly, the increase in online spending boosted demand for services offered by the likes of Amazon and Mainfreight.
While the virus is likely to result in some permanent changes to the global economy, its impact on financial markets may end up being more transitory. Covid-19 may become just one of many risks that need to be priced-in, particularly if we have to learn to live with it for some time.
While the virus does continue to spread globally, mortality rates are declining and confidence is increasing that treatments will become more effective, with progress reported in numerous vaccine trials around the world.
This increases the sense that Covid-19 may become “manageable”, as indicated by the re-opening of some borders in the northern hemisphere.
The impact of economic lockdowns on consumer spending has been alleviated by wage subsidies, mortgage holidays, and supplementary unemployment payments.
While not being able to travel overseas on holiday, consumers have spent on cars, art, house renovation, furniture and appliances, and dining-out.
Globally, this has led to a V-shaped recovery in manufacturing and logistics (storage and distribution) in many economies.
Those countries that imposed the harshest lockdown measures seem to have recovered the quickest, as we have seen from stronger than expected activity data in Europe and China.
However, millions of people around the world have become unemployed. Thousands of businesses continue to struggle and many will likely close as financial support expires.
So while the performance of the sharemarket and the response by consumers is consistent with a V-shaped recovery, the positive sentiment could slow or even stall in the coming months, depending on the course of the virus.
One thing we can rely on is the commitment by central banks to keep interest rates at current historic lows until the global economy has weathered the viral storm and is on track to meet employment and inflation targets.
Central banks have unlimited power to keep printing money to purchase financial assets and will likely keep doing so while the negative impacts of Covid-19 on economic activity continues.
With interest rates pinned down near zero, equities and real assets such as property will continue to find support from investors with little or no alternative for their cash.
Actions from governments and central banks have stabilised financial markets. But there is still plenty of uncertainty, and as we’ve seen over the past few months, sentiment can change quickly. There is potential for further market volatility ahead.
The past few months do reaffirm some important messages for investors.
We don’t believe it’s possible to consistently time or predict short-term movements in markets. Markets oscillate between greed and fear.
And they don’t need a positive economic backdrop to bounce.
Today, markets expect a “less bad” outlook than they did in March. The low returns on offer from cash and bonds will continue to encourage investors into equities.
We all prefer positive over negative news. Investors generally feel better when markets go up, and it can be disconcerting when they go down.
But unfortunately volatility is something investors will always have to bear.
The key is managing your response to it. Working with your Forsyth Barr Investment Adviser to formulate and stick to an investment plan with clear objectives, is one of the best ways to do so.
This column is general in nature and is not personalised investment advice. This column has been prepared in good faith based on information obtained from sources believed to be reliable and accurate. Disclosure Statements for Forsyth Barr Authorised Financial Advisers are available on request and free of charge.