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.

Such has been the significance of COVID-19, there is unlikely to be a single reader of this newsletter who isn’t aware of what it is, where it came from, and at least has a broad understanding of the kind of impact it has had on investment markets.

For a detailed review of the asset class performances for the first three months of the year, see ‘Key market movements for the quarter’.

But, first, we’d like to give you some context. Not just in relation to the asset class returns information you will see there, but also in relation to what this might mean as we sit here today and ponder the weeks and months ahead.

As we attempt to shed some light on this extraordinary period, we have framed this by addressing a few of the common questions we have been asked.

Why did investment markets react so severely in February and March?

COVID-19 is what economists call a ‘black swan’ event; something so rare and unlikely that most people have no way to adequately anticipate it.

Markets also struggle with such events, as they can quickly affect the outlook for companies and industries in ways that were never considered in previous earnings forecasts. This is a key point because expectations about future company earnings play an important role in how most shares are valued on any given day.

In February and March, while many countries, including New Zealand, were implementing physical containment measures aimed at limiting and, hopefully, eradicating the virus, the markets were frantically trying to assess the likely economic impact.

The world economy, which had formerly been travelling along quite nicely at just below open road speeds, had unceremoniously had the handbrake applied. With many companies’ earnings outlooks being slashed virtually overnight and facing a heightened risk of insolvency, global share markets experienced their fastest simultaneous sell-off in history.

In just 33 days from 19 February to 23 March, the S&P Global Broad Market Index (covering over 11,000 companies spread across 25 developed and 25 emerging markets) fell -34.4%. Over the same period, the main US share market index (the S&P 500 Index) fell -33.9% and our own NZX 50 price index fell -30.1%. The speed and severity of the decline have not been matched in living memory.


What has been happening in portfolios?

With the extreme market conditions in February and March, it was a highly challenging time for all assets, and particularly higher-risk assets. Regardless of the portfolio risk level, returns were negative for the quarter, and the size of the decline was larger for portfolios which included higher exposures to growth assets (i.e. shares).

Diversification means most investors are not solely exposed to equity markets and instead hold some blend of bond and share investments in their portfolios. With higher quality bond markets generally holding up well, this helped soften the impact on portfolios that had allocations to these assets, while a weaker New Zealand dollar also provided some useful cushioning effects. But, overall, the negative returns from share markets were too widespread and significant for portfolios not to have been adversely affected.

Towards the end of the quarter, we did see global equity markets recover some lost ground, but it remains too early to know whether this is a temporary respite or the start of a more permanent trend.

What can we expect from here?

What has made the current market so demanding is that the world has never experienced an event quite like this? Nothing since the Great Depression (1929 to the late 1930s) has had such a widespread impact and created such uncertainty.

However, in today’s crisis, we have almost 100 years of additional accumulated market and economic experience to call on, as we seek a sustainable solution. And, in response to the unique nature of the COVID-19 pandemic, there has never before been such a flood of scientific and government support.

Central banks that could still cut interest rates cut them hard in March. New Zealand dropped its Overnight Cash Rate from 0.75% to 0.25% on 16 March, with comparable interest rate adjustments made in Australia, USA and the UK.

In addition, many governments also announced quite extraordinary levels of financial support, primarily to businesses. The New Zealand government delivered an initial stimulus package equivalent to at least 6.3% of GDP. This was backed up by the Reserve Bank of New Zealand announcing an additional $30 billion government bond repurchase plan, to provide additional liquidity support to the economy and to help restore order to the local bond market. Across the world, we have seen a host of similar support packages being announced.

The aim of these global stimulus packages is to help businesses and employees survive through this immediate period of uncertainty, until each economy can, hopefully, emerge intact out the other side, to commence some form of sustainable recovery.

There are various pathways a recovery could take. At the two extremes are a prolonged recession or a swift recovery. However, the more likely scenario lies somewhere in between. Governments have already displayed a willingness to underwrite a recovery at seemingly any cost to hopefully avert a prolonged recession, yet the significant business disruption and job losses that have already occurred are unlikely to be repaired quickly.

Whatever shape the recovery ultimately takes, the performance of the share market will be a leading indicator. In other words, share markets will be very likely to have commenced their rebound well before any improvement in medical or economic data is evident.

This perhaps explains what we have witnessed more recently. From the lows on 23 March, when global markets had been in a state of near freefall, they unexpectedly began to rise quite strongly. In the month from 23 March to 24 April, the S&P Global Broad Market Index rebounded +23.0%. Likewise, the S&P 500 Index bounced back +26.8% and our own NZX 50 price index delivered +22.6%.

It is far too early to say that 23 March was ‘the bottom’ and that the market recovery is now assured, but it is a strong signal that investors are eager to look past the ongoing and still unresolved problems of COVID-19, towards a more promising future.

What should I do?

It may not be easy but given the unprecedented nature of this event and the emotive news headlines surrounding it, we need to try and compartmentalise information into three separate buckets.

In the first one, gently place all the horrible medical statistics. Label that bucket “the human impact of COVID-19”.

Then put all the awful economic news, company closures and corporate earnings write-downs in another bucket. Label it “reasons share markets have already gone down”.

Finally, in the last bucket, put shares. Label that bucket “leading indicator”.

Memorise that final label, so that when share markets do turn increasingly positive, you remember they are hinting at what the economy will do in the future, not what it has already done.

Remember also that while no one can predict the precise day it might happen, the share markets will very likely tell us life is going to get better, well before we actually feel and see those improvements in the world around us.

Now more than ever, we need to simplify our approach. We need to focus on things we can control and to firmly embrace the actions and behaviours that, over time, are more likely to deliver the best results. In the same vein, we also need to steer clear of obvious pitfalls.

Emotional reactions to markets – whether its euphoria during a rally or anxiety during a correction – are often extremely damaging to long term investment success. It’s easy to commit to a strategy when the markets are up. It’s much harder to stick to that strategy when your portfolio is falling and your job, and health, may suddenly look less secure. However, you won’t be able to reap the rewards of long term investing if you are unable to take the bad days along with the good.

So, if you have a long term investment plan in place and if your goals, objectives and circumstances haven’t changed, then the best thing you can do is not to panic.

Talk to your adviser if you need to update your information or your situation has changed but otherwise your adviser will be in contact with you if any action needs to be taken to keep you on track to achieve your long term goals.

If you are still experiencing anxiety, turn off the news, stay off social media, and make some plans to do something fun to celebrate the day we are all released from our bubbles.

"Now more than ever, we need to simplify our approach. We need to focus on things we can control and to firmly embrace the actions and behaviours that, over time, are more likely to deliver the best results."


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.