Investment Market Update for the quarter ended 30 April, 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. In many countries all but non-essential businesses have been closed. 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 still won’t prevent sizeable layoffs. The outlook for corporate earnings is highly uncertain. Many companies have suspended earnings guidance, with little clarity over the medium-term.
Policymakers have responded
From late March onward, aggressive 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.
Defensive markets and sectors have led the rebound
Policymaker responses kicked off a rally in asset prices. From late March, equity and bond prices have recovered sharply. Positive momentum was sustained as lockdown measures across countries have (so far) proven effective in containing the virus’s spread. Lockdown restraints are now starting to be lifted.
The rebound in equity markets has been led by higher quality, defensive stocks. New Zealand’s outperformance reflects the defensive nature of many of the leading companies on our market. Healthcare companies like Fisher & Paykel and EBOS, consumer staples such as a2 Milk, electricity utilities, and telecommunications, will all be more resilient through an economic downturn than most.
The US market is similarly defensive, dominated by large technology companies like Microsoft, Amazon, Alphabet (Google) and Apple, and consumer staples like Johnson & Johnson, Walmart, and Procter & Gamble.
More cyclical sectors – like energy, financials, and materials – that are more exposed to the level of economic activity have lagged.
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.
The result is a tremendous amount of uncertainty as to how economies and companies will fare.
Will there be a second wave of the virus? What damage is being done to economies while in lockdown? How many jobs will be lost? How many businesses will fail? Will a vaccine or medical treatment be found, and, if so, when? Forecasters are grappling with a 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 the 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.