fbpx

Pandemic infects global economy

0

Investment market update (for the quarter ended 31 May, 2020)

Covid-19 has undoubtedly been the most dramatic black swan or unexpected shock since the 9/11 terrorist attack. The threat has rapidly shifted from an outbreak in China, where the principal economic concern was the impact of Chinese manufacturer shutdowns on the rest of the world, to a global pandemic.

Governments around the world responded. Many countries shut all but non-essential businesses. The economic and financial landscape has seen a dramatic shift. Interest rates have plunged. Policies to protect jobs and businesses have been enacted, but they haven’t prevented sizeable layoffs.

The outlook for corporate earnings remains highly uncertain. Many companies have suspended earnings guidance, with little clarity over the medium-term.

Despite the challenging backdrop, markets have bounced strongly.

Since the 23 March trough, the MSCI World Index is up +37 percent helped by the aggressive responses from policymakers around the world, and more recently, a slow but steady easing of lockdown restrictions and opening up of economies.

Policymakers have acted

From late March onward, assertive responses by central banks and governments around the world shored-up financial markets.

Central banks have cut interest rates, provided liquidity to the banking system so banks can continue to lend to businesses, and have started or continued buying bonds to help stabilise credit markets.

Governments have provided a range of support measures including wage subsidies to workers forced to stay at home, loans for banks to encourage financial support for businesses, mortgage holidays, and some tax relief.

Looking forward, a number of governments are already planning to accelerate and expand investment in infrastructure as a key policy platform to help the economic recovery.

An early bounce in economic activity

Economies are tentatively emerging from lockdowns. As China reopened much of its economy and its factories reopened, demand for Australian coal and iron ore has surged. The oil price which dropped to less than US$20/barrel in April, has bounced back to $US35.

The price of copper, which has widespread use in industrial manufacturing, has jumped more than 20 percent since late March. Financials or bank stocks rebounded late in May, along with smaller company stocks, which is typically a sign that investors are gaining greater confidence in the economic outlook.

Alphabet soup

A word that has been used a lot recently is “unprecedented”. These are unprecedented times. There hasn’t been a global pandemic since the 1918 Spanish Flu, and the world is a very different place today than it was back then.

While equity markets have displayed more optimism in recent months, there remains a tremendous amount of uncertainty as to how economies and companies will fare.

Will there be a second wave of the virus? What damage has been done to economies while in lockdown? How many jobs have and will be lost? How many businesses will fail? Will a vaccine or medical treatment be found, and if so, when? Will US-China tensions simmer, or escalate into a new Cold War?

Forecasters are grappling with the very broad range of possible outcomes over the next few years.

What will a recovery look like? V, U, W, L? A rapid recovery is described as ‘V’ shaped – a sharp downturn followed by an equally sharp upturn. A ‘U’ is a longer period at the bottom before activity picks up gradually.

The most pessimistic are ‘W’, a double dip or an initial recovery that doesn’t prove sustainable, or ‘L’ where economic activity falls sharply and remains low for an extended period.

More volatility potentially ahead – be prepared

There is no doubt that actions from governments and central banks have stabilised financial markets. We think that market lows are most likely behind us.

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 do not need a positive economic backdrop to bounce – markets expect a “less bad” outlook today 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 news over negative. 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.

Share.

About Author

Brett Bell-Booth

Investment Advisor with Forsyth Barr Limited in Tauranga. Phone: (07) 577 5725 or email brett.bell-booth@forsythbarr.co.nz

Comments are closed.