What A 12 Months – Tickets Please ….

So you’ve paid your money and you hand over your tickets before taking your seat on the ‘investor rollercoaster’.

Pre Covid-19

From July 2019 up until late February 2020, all seemed fun with things looking relatively ‘rosy’ as we rode the investor rollercoaster to all time highs (around 7500 on the All Ordinaries here in Australia and around 29500 on the Dow Jones in the USA).

This period saw strong gains across much of the global share markets – company earnings were healthy, central banks were reducing interest rates, discussions on the final Brexit details were moving forward and there was an easing in the USA / China trade war all helping to push fears of a recession to the background.  The biggest thing, looking forward, was whether President Trump might win another term.

It seems like an age ago now but here in Australia, we battled intense and devastating bushfires and floods (what a country) and the share market still pushed ahead.

There was a thought though tickling the back of investor’s minds that maybe the rollercoaster was just nearing the peak of the initial climb with company share prices potentially a little ‘top heavy’ and that some sort of drop was possible.

Well those musings were correct but not for the reasons thought … hello Covid-19.

Free fall (hands in the air)!

Post Covid-19

News of some sort of Covid outbreak in China started in January but it wasn’t until late February that the world really started to fathom the monumental impact that Covid-19 would have for the globe as cases in Europe, Australia, USA and emerging markets swiftly increased.

This fear then led to share markets quickly falling in late February by around 35%, commodity prices fell too and the US dollar strengthened (the Australian dollar hit a low of US$0.55) as investors factored in ‘worse case’ scenarios.

It was only around 4 weeks after the Covid-19 news hit the airwaves, in late March, that the All Ordinaries hit a (then) low of around 4400 here in Australia and the Dow Jones hit around 18600.  There was no way to know then that this was a turning point as the investor rollercoaster headed back up again on the back of monumental Government stimulus and dreams of a vaccine.

And Now

Since that late March point, the markets have rallied to a point now where the All Ordinaries is now around 6250 and the Dow Jones is around 26700 – still 17% and 9% respectively below the Pre-Covid highs but over a 40% jump from the March depths.  The Australian dollar is around US$0.70 (a 27% increase from the bottom) and commodity prices have firmed (especially iron ore as China’s demand has rebounded and South America (Australia’s largest iron ore export competitor) is in the grips of seemingly ever-increasing Covid-19 numbers).

A Slightly Longer Term View

So, despite this wild ride of recent times, the financial year just ended saw global shares return around 5.2% in Australian dollar terms thanks largely to the tech and healthcare heavy USA share market.  Australian shares were down 7.7% for the financial year.  With the Reserve Bank of Australia (RBA) anchoring cash rates at 0.25%, returns here were hard to find but bonds provided reasonable returns as plunging yields saw capital gains in this space.  Listed property was hit with double-digit losses resulting from a slump in economic activity pushing up vacancies and depressed rents in retail and office properties.

Source: Thomson Reuters, AMP Capital

This last period has again reinforced key investment principles being (i) diversification is key and (ii) timing the market is hard (nigh, impossible).  We might also throw in (iii) beware the crowd mentally (especially at times of heightened emotions) as Warren Buffet has been quoted as saying, “be greedy when others are fearful and fearful when others are greedy”.

So What’s Coming

Covid-19 will continue to be the biggest influence on investment markets for the foreseeable future with the number of cases continuing to grow (both here in Australia and especially overseas).  The obvious threat to economic activity is clear with some estimating that even this current 6 week lock-down in Melbourne will reduce Australia’s GDP by 1% this quarter alone.  Some businesses, many even, will not survive and unemployment will remain high with property prices likely to fall.

But there is increasing optimism for a vaccine and global governments remain committed to providing fiscal stimulus in a low interest rate environment.

The US Presidential Elections in November may provide a positive push to the investment markets if President Trump secures a second term (especially in the USA) but a question mark remains over USA / China tensions and what may be said or done by President Trump if it becomes obvious that he will lose (which betting agencies currently suggest is a real possibility).

This all leads to heightened uncertainty and increased investment volatility so, the investment rollercoaster rolls on (“please remain seated and hold on”).