Markets and COVID-19. What just happened?

The last six months has seen extreme movements on both Australian and global share markets driven by the COVID-19 outbreak and subsequent government policies imposed in an attempt to manage the spread of this pandemic and policies designed to support economic activity over this period.

This year began with the very strong returns of 2019 in Australian and global share markets continuing into early 2020, reaching record highs in February 2020. In late February, it became clear that the virus from Wuhan, China, had spread into the rest of the world and was causing a major health crisis. Governments responded with measures to shut down large parts of their economies in an attempt at controlling the spread of this very deadly and contagious virus. This triggered very sharp falls on Australian and global share markets in late February, with panic gripping some investors as they sold shares in the face of uncertainty. These steep falls continued for around four weeks, with markets bottoming around 23 March and then beginning a rapid recovery.

The key drivers of this rapid recovery in share markets, after the very steep falls, seem to be attributed to a number of factors:

  1. A belief that the recessions in the world’s major economies, while very deep will be short lived
  2. World governments response to the crisis with massive fiscal stimulus aimed at supporting household jobs and consumption in their economies over this period
  3. Central banks response to the crisis by cutting interest rates to effectively zero. This had a huge impact on equity markets, driving capital back into share markets in pursuit of a return because there is no safe haven anywhere in the world today where investors can earn a reasonable return given cash rates are near zero.

The recovery in US share markets has been stronger than that seen in the rest of the world, despite the US being in a very deep recession. This recovery has been primarily driven by the heavy concentration of technology companies listed in US markets. Many of these companies have been big winners during the COVID-19 recession and the subsequent shutdown and working from home, in the US and globally. Examples include names like; Microsoft, Apple, Netflix, Amazon and other companies like these, that have been huge beneficiaries from the current environment. In contrast to the Australian share market, which does not have a big tech sector, but rather is instead dominated by the banking sector which is currently under a lot of pressure, mainly from very low level interest rates impacting their margins and the risk of a material increase in bad debts from their large mortgage books.

Markets have an expectation that an effective and reliable vaccine will soon be available to protect against COVID-19. If populations can be immunised against the virus quickly and cheaply then it is likely that there can be some return to normality of human movement and interaction.

The recent downturn and subsequent recovery in share markets has again illustrated the need to maintain a long-term focus with strategy and portfolios and to avoid short-term reactive moves in periods of extreme volatility. This is where professional financial advice from experienced practitioners demonstrates its value.

Please contact the PKF Wealth team if you would like to talk further on how we could assist you with our knowledge and experience.

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