Investment Update – 3 April 2020

Whilst far too early to call the end of the recent sharemarket falls it has been encouraging to see more positive results in sharemarkets in the last week. The Australian Sharemarket even had it’s biggest single day gain on record recently. The reasons for some positivity in markets are varied and include:

  • the massive amount of stimulus that Government’s around the world are using to ensure businesses stay afloat and people remain employed
  • Some light at the end of the tunnel with many countries now successfully managing to “flatten the curve”
  • Investors buying back into markets to take advantage of the shares currently offered at a discount
  • The realisation that markets might be getting closer to a bottom and therefore likely long-term gains for those who are willing to ride-out any short-term fluctuations

However, it’s not all going to be good news and our expectation is for the volatility to continue in equity markets as more information comes to hand about the true extent of the Coronavirus and the impacts it has on various businesses and economies around the world. 

We still believe remaining invested will leave your investments in the best position to meet your long-terms investment objectives. We have included below a question and answer session put together by Dr Shane Oliver, Head of Investment Strategy & Chief Economist at AMP Capital, that we believe gives a good summary of some of the questions you may be wondering about.

We have included some key questions and responses below.

When will shares recover?

The historical record of share markets through a long litany of crises tell us they will recover and resume their long-term rising trend. The massive global policy response to support economies in the face of coronavirus driven shutdowns is starting to tilt the risk scales against a long depression scenario. This is why share markets have started to get some footing over the last week or so after seemingly being in free fall for a month.

Could anti-virals or a vaccine improve the outlook?

Put simply yes. A study of past epidemics and the medical response to them by my colleague Brad Creighton shows an ability of governments working with scientists and the medical community to rapidly speed up the development and deployment of anti-virals and vaccines. There is now a massive global effort on this front and some drugs are promising. 

Why is monetary stimulus necessary? Low interest rates won’t get us to spend when we are stuck at home.

Yes, people can’t spend much now, but as with government stimulus much of the central bank easing has been aimed at “protecting” the economy. This has three key elements:

  • lowering interest rates to make it easier for borrowers to service their loans – eg, the RBA has cut interest rates and targeted lower bond yields to cut long term borrowing costs;
  • pumping money into financial markets to make sure they keep functioning. As the crisis intensified bond yields perversely started to rise (as fund managers had to sell their liquid winning assets to meet redemptions) and corporate borrowing rates surged as investors feared defaults so the Fed pumped money into the US bond and credit markets to push yields back down. The ECB has done something similar in Europe by buying Italian bonds; and
  • ensuring cheap access to funds for borrowers – eg, the RBA has provided funding for banks for 3 years at 0.25% which has enabled the banks to cut rates and offer debt payment holidays. The Fed is even undertaking direct lending.

Dr Shane Oliver’s full list of questions and answers can be found here.

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