Quarterly market commentary - June 2020
While the first quarter of 2020 will long be remembered for the global emergence of Covid-19 and an unprecedented market downturn, the second quarter will be remembered for the extraordinary resilience of investment markets.
Over the last three months, we witnessed a significant rebound from the first quarter’s decline. The turnaround was remarkable not just because of the size and breadth of the investment returns delivered, but also because the global pandemic that drove markets downward with such force in February and March, had not receded. In fact, by almost any measure, the global health crisis triggered by Covid-19 had only intensified.
For many observers, it felt counterintuitive that the markets began to ignore the burgeoning health crisis. Or, for that matter, the growing economic fallout, including sharply higher global unemployment and negative economic growth rates.
However, as we observed in last quarter’s newsletter, “whatever shape the recovery ultimately takes, the performance of the share market will be a leading indicator. In other words, share markets will be extremely likely to have commenced their rebound well before any improvement in medical or economic data is evident”.
This has unquestionably been the case. What markets appear to have focused on have been the following five elements:
- Even though we still cannot see an immediate end to the Covid-19 pandemic, there is an underlying expectation that, at some point, this will be controlled (or eliminated) and that business as usual, will return.
- The general easing of Covid-19 lockdowns internationally, and an associated pick-up in economic activity in the second quarter, helped improve investor sentiment and risk appetites.
- By the end of March, prices had dropped so far that the future expected returns for many businesses (despite increased short term uncertainty) began to look increasingly attractive.
- Central governments are clearly committed to providing an unparalleled amount of fiscal and monetary support (via wage subsidies, spending initiatives, interest rate controls, tax breaks, etc) to help engineer an economic recovery.
- Interest rates are going to be held at extremely low levels, for as long as necessary, to ease the debt burden on individuals and businesses, and to encourage increased spending and investment.
In other words, markets “looked beyond” all the prevailing bad news stories and focused instead on the longer-term outlook. When viewed through that lens, investing in risky assets changed from looking unnerving (March) to looking increasingly appealing (April to June).
This explains how global share markets, in particular, staged a sizable rally between April and June (for more details, check out the Key Market Movements).
When Covid-19 emerged in the early weeks of 2020, it was a giant domino that triggered a series of unimaginable events:
- The grounding of planes
- The closing of borders
- Social distancing and national lockdowns
- Escalating confusion and fear
- An unprecedented market correction
- Massive fiscal and monetary support by governments and central banks
Air New Zealand provides a case study for how unexpected this was and how quickly it evolved. On 27 February, Air New Zealand announced a six-month after-tax profit of $101 million and expressed confidence they would be able to effectively manage their way through the emerging Covid-19 outbreak. By April, it had been forced to reduce its network capacity by more than 95% and required an emergency loan facility of $900 million from the New Zealand government. Extraordinary.
Air New Zealand, of course, wasn’t the only business to suddenly encounter significant COVID-related problems. But the point is if these firms couldn’t easily foresee the impact on their own businesses, it highlights something we know only too well - just how difficult it is to correctly forecast the future.
In the first quarter, investors weathered the financial fallout from all of this. In the second quarter, they benefited from their own resilience and the forward-looking nature of markets. In many cases, investor resilience was fortified by communicating with their financial adviser.
Good advice (and smart investing) isn’t based on trying to defy the odds. We know that events like Covid-19 will very occasionally come along and, thankfully, we don’t need to be able to predict how or where they will strike, or exactly what impact they might have. Instead, we need to focus on making sure that we have a sound long term investment strategy that investors can continue to hold, even when the going gets tough. Because bailing out of a plan at the wrong time, and missing the inevitable rebound, is a setback that can have far more devastating long term consequences.
A key component of any sound long term strategy is to:
- Always be well-diversified (minimising your exposure to company-specific risks, or to a single industry or asset class);
- Always take a risk in amounts you can tolerate (so you can hold on through periods of heightened uncertainty); and
- Always talk to your adviser if you get concerned or if your plans change.
We don’t know what the future holds. Given what we’ve seen so far this year it would be a brave person who said that they did. But we do know that Covid-19, by many measures, can be described as a one in one hundred year event. We hope that assessment ultimately proves to be accurate.
For a detailed review of the asset class performances for the first three months of the year, see ‘Key market movements’ or click here to view the full newsletter in PDF.
Information contained in this newsletter does not constitute personalised financial advice because it does not take into account your individual circumstances or objectives. You should carefully consider whether the Synergy investment portfolios are appropriate for you, read the applicable offer documentation, and seek appropriate professional advice before making any investment decision. The information in this newsletter is of a general nature only. Investors should be aware that the future performance of the Synergy investment portfolios may differ from historic performance. Details are correct as at the date of preparation and are subject to change. The investment objectives and strategies of the Synergy investment portfolios may change in the future.
While every care has been taken in its preparation, Consilium NZ Limited (‘Consilium’) makes no representation or warranty as to the accuracy or completeness of the information in this newsletter and does not accept any liability for reliance on it. The capital value, performance, principal, and returns of the Synergy investment portfolios are not guaranteed or secured in any way by Consilium, or any other person. Investments in the Synergy investment portfolios do not represent deposits or other liabilities of Consilium and are subject to investment risk, including possible loss of income and principal invested.
Key market movements - June 2020
Following the remarkable price action of the first quarter, the investment roller coaster that is 2020 continued from April to June. Markets responded very strongly to ongoing financial stimulus (central banks buying securities), accommodative monetary policy (low interest rates) and an upward revision in expectations about the impact of Covid-19.
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Quarterly market commentary - March 2020
On 11 February 2020 the world was introduced to a new name, which, over the following weeks, came to dominate global news cycles. That name was COVID-19.