Financial Insights with Australian UnityPosted: April 21, 2021
A look back at a year that shocked the markets and economy globally
Author: Alex Fisher, Portfolio Manager Australian Unity
COVID-19 has changed all elements of life in ways we could not conceive prior to early 2020. One year on from the COVID-19 induced share market declines and the start of a truly remarkable run-up across growth assets, we review some of the key economic and investment market developments across this period, and conclude with a reminder that in the short term, investment market performance can diverge significantly from economic conditions.
The economic impacts of COVID-19 have been severe. The virus’ transmission depends on human contact, and government and society’s immediate reaction to the virus was to suspend travel, limit social and employment gatherings and restrict in-person interactions. This was accompanied by government, central bank support and stimulus measures, such as Australia’s JobKeeper and JobSeeker programs, along with childcare, borrower and tenant support measures, to mitigate the impacts on individuals and small businesses. However, we saw sharp and immediate falls to nearly all measures of economic activity.
The Australian workforce declined in size by around 5% (reduced from nearly 63% to 59% of the adult population) between February and June 2020, with the bulk of layoffs occurring in March and April as Australia entered the first lockdown period. Australia’s experience, cushioned somewhat by Government support packages, was relatively mild by global standards; for example, the US unemployment rate rose from 3.8% in March 2020 to 13.1% by June 2020, with around 15 million workers losing jobs during the quarter.
Labour productivity was little-changed, but whole-of-economy production fell sharply during the June quarter, reflecting the decline in employment numbers and cut-backs to hours worked. Australia’s inflation rate also turned negative in the June quarter, with the largest impacts being a 95% cut in childcare costs, free before- and after-school care, and a 6.8% decline in transport (petrol) prices.
These whole-of-economy measures disguise wide divergence between specific industries’ and companies’ performance. For example, home electronics companies benefited from white collar workers’ need to set-up home offices, even as the outlook for office landlords was clouded by “stay home” orders and uncertainty over ongoing rental income. Meanwhile, hotels, restaurants and cafes suffered from sharply-reduced patronage, while supermarkets achieved turbo-charged sales volumes.
Economic activity increased significantly in the September quarter, as global success in suppressing the disease enabled economies to cautiously re-open. However, most measures of economic activity remain somewhat below pre-COVID-19 levels / trends. The economic benefits from vaccine rollouts enabling society to open-up will start to show-up from the March 2021 quarter, although it remains to be seen whether economic activity fully recovers to its pre-COVID-19 trendline, or if there will be a permanent loss of productive capacity.
Investment markets have followed a somewhat different path over the past year.
Despite a global case load of just over 86,000 cases at end-February 2020, share markets turned sharply negative late in the month, off the back of worse-than-expected consumer sentiment and producer price figures, and continued to fall sharply through much of March as layoffs commenced.
Global government support measures failed to stem the bleeding across equity markets until US politicians announced (and subsequently passed) a USD $2 trillion aid package on 23 March 2020. By this time, Australian shares had fallen by 36% from their late-February high, with listed Real Estate Investment Trusts (REITs) down 49%. International shares had fared similarly, with the US S&P500 Index down 34% and the technology-heavy NASDAQ Composite index 30% below February-levels (the pace of decline across all these markets was close-to the fastest on record). The Australian bond index barely moved during this period; government bond yields reduced slightly (increasing the price of government securities), but credit spreads widened for corporate bonds, leading to modest falls on these assets.
In some respects, share returns since March 2020 have been even more remarkable than in the February-to-March 2020 sell-off. Markets have achieved sharp gains since March 2020’s lows; the ASX’s 54% gain was trumped by the NASDAQ’s 95% gain in the past year. Once markets determined that governments comprehended COVID-19’s potential health impacts and (via support packages) were committed to alleviating economic impacts, investors stopped indiscriminately selling-down shares and a relief rally ensued through April.
In the subsequent months, most share markets have continued to rise, albeit with periods of investor nervousness and decline. Returns have been due to a combination of stock-specific factors, changes in risk-free rates and required risk premia, plus elements of momentum and speculation (notably the mania surrounding US retailer GameStop).
The strongest returns have been achieved in companies and industries that benefit from the past year’s societal changes. Fast-growing, high-technology companies such as the US’s “FAANG” companies (Facebook, Amazon, Apple, Netflix and Alphabet (Google)) have performed particularly strongly, in part due to these companies’ strong pricing power. Cuts to government policy rates, and a view that rates will remain low for an extended period, have also supported share prices along with interest-rate-sensitive assets like listed REITs.
In November 2020, successful COVID-19 vaccine trials gave share markets a further boost, and most markets have continued upwards since that time. Companies benefiting most since November include those that require in-person human interaction (and which stand to benefit from society re-opening after vaccines are administered), such as airlines, accommodation and education companies.
From early 2021, bond markets have also fallen (although to nowhere near the extent that share markets declined in early 2020). Fixed interest investors worry that central bank stimulus will stoke inflation over time and are demanding a higher yield on their investments.
The world has changed in ways unimaginable a year ago. Our daily lives remain significantly changed, with the prospect of COVID-19 vaccines moving society toward (but not all the way back to) the lifestyles and working patterns we adopted pre-COVID-19.
Despite this, many investment markets around the world sit at higher levels than they did pre-COVID-19, underwritten to a degree by unprecedented government support/stimulus measures which will need to be unwound over time.
Future investment returns may be volatile and may differ significantly across asset classes. Investors can mitigate their risks in various ways, including holding a diversified portfolio of assets. Importantly, time in the market also reduces risk, rather than selling when the market panics and realising a loss.
Please contact your adviser if you wish to discuss this further.
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