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Virus-economy tug-of-war

Investment market update (for the quarter ended 30 June, 2020)

Most countries are grappling with the tension between curbing the health effects of Covid-19 and minimising the economic damage of restrictions and lockdowns.

Whilst the virus does continue to disrupt most economies, lockdown measures are generally being eased.

On balance, economic activity has generally been better than most feared two or three months ago.

That said, better-than-expected doesn’t mean great, and there are still uncertainties ahead. As an example, equity markets responded favourably to the latest US jobs report, with the unemployment rate dropping from around 16 percent to around 12 percent. But 12 percent is still very high, meaning two-thirds of those who’ve lost jobs since March remain unemployed.

The question being asked in the US and elsewhere around the world is the same one we’re asking in New Zealand. What does the economic picture look like once pent-up demand from lockdown has passed and government support for workers and businesses ends? Only in time will we get a clear view on the health of the underlying economy.

In places such as the US (in particular), Australia, Korea, and Japan, challenges have been compounded by the rise or re-emergence of Covid-19 cases as lockdown measures have been eased, resulting in the reinstating of restrictions or slowing reopening plans. Fortunately, to date, outside of imported cases the virus has not re-emerged in New Zealand.

Equity markets continue to rally

Despite the challenging and uncertain backdrop, equity markets have continued to rally. Since the 23 March trough, the MSCI World Index is up +39 percent helped by the aggressive responses from policymakers around the world, and steady easing of lockdown restrictions and opening up of economies.

In more defensive markets, such as the US and New Zealand, equity markets are now down only three percent and one percent respectively for the year.

More cyclical markets like Australia and Europe are down 10 percent and 12 percent. In our view, ultra-low interest rates remain a key support for equities. The low returns on offer from defensive investments such as bonds and term deposits are inducing people back into equities more quickly than they otherwise would have.

Stay prepared

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 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 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.

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

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