April monthly market update – a Covid-19 recovery?

05 May 2020

Market performance

 

Local currency market returns

 

kōura fund returns

 

1 month

3 months

12 months

 

1 month

3 months

NZ Equities

7.5%

(10.1%)

1.7%

 

7.6%

(11.6%)

US Equities

12.8%

(9.3%)

0.3%

 

10.4%

(9.4%)

Emerging Markets

8.8%

(8.9%)

(2.5%)

 

3.5%

(7.4%)

Rest of World

5.5%

(15.0%)

(3.6%)

 

3.4%

(14.9%)

Fixed Income

2.6%

3.6%

2.6%

 

2.7%

1.5%

kōura Growth Fund equivalent

 

 

5.9%

(9.1%)

 

April was a risk on month for the stock markets.  The US share market had its best month since 1987 (just a couple of months before the historic Black Monday) rising by almost 13% in the month.  The US markets have rallied over 30% since their lows in Mid March and are now sitting 12-15% below their previous peaks.

Investors are becoming increasingly confident that the world can quickly emerge from the respective lockdowns and we can quickly get economic activity back to where it was. 

Are you a bear or a bull?

The biggest question in finance at the moment is whether this market rally is sustainable or whether we are set for another market fall.  There are three main factors at play here, and your view on each of these factors will make you “a bull” (expecting further market recovery)  or “a bear” (expecting a market downturn). 

Factor 1 – The scale of the upcoming recession

In economic terms, the Covid-19 is being called the “Big Freeze” by economists.  At the moment, over 50% of the world’s population and two-thirds of the global economy in lockdown.  During this Big Freeze, people just aren’t spending money effectively putting economies into pause.

Unfortunately, this is going to lead to a significant spike in business bankruptcies and an increase in unemployment.  Some economists are predicting that unemployment will grow 3-4x from the current low levels. For countries like New Zealand and the USA, this means unemployment COULD rise from our historic lows of 3-4% into the realm of 15-20%.  For context, unemployment peaked at just over 10% during the Global Financial Crisis in 2009. 

The International Monetary Fund has forecast that this will be the deepest recession since the Great Depression in the 1930s.

Factor 2 – The speed with which we recover from the recession

Arguably, the size of the recession is less important than the speed with which we can recover from the recession.  If it is a short sharp V-shaped recovery, then the economic damage can be limited, whereas a longer U shaped recovery will cause significantly more long term damage. 

This is probably the area of greatest debate at the moment between economists and markets.  The shape of the recovery (V vs U shape) will depend on how successful we are in the battle against Covid-19 and whether we end up needing to go back into lockdown or not. 

It is important to remember that markets always look forward and therefore will assess companies over a medium to long term view.  Therefore if the recession can be V-shaped earnings will recover and the long term implications will be less significant. 

We have read a great piece of research from UBS laying out four recovery scenarios (released on April 10).  Fair to say, the market is currently pricing in the upside scenario laid out in this paper.   

Factor 3 – The impact of Government and Financial assistance

While we have not seen anything like Covid-19 in our lifetimes, we have never seen Government and Central Banks step up to the plate so quickly.  In some respects, we are very lucky that we have a number of Governments heading for elections in 2020 which ups the ante for politicians to muscle through a speedy market recovery

Government stimulus packages have reached into the trillions and have dwarfed anything done during the Global Financial Crisis in both speed and their size.  Central banks around the world have moved to cut interest rates and provide liquidity into credit markets by purchasing both Government and Corporate Bonds.  This liquidity will keep interest rates low and ensure that credit remains available to corporates (which will keep people in employment). In New Zealand, we are looking at the prospect of negative interest rates for the first time in our history. 

Some investors are worried about the impact of this fiscal stimulus; whilst the stimulus is critical for keeping businesses open and economies ticking over, Governments are incurring debt like never before, and this debt will need to be paid back one day.   This means higher taxes and lower Government spending in the future which will be detractors of future growth. 

New Zealand an outperformer, or an outlier

The New Zealand market has been one of the strongest global performers in 2020, the New Zealand market is currently down under 10% year to date, whereas other global markets are down 13-20%. 

The main reason for this is the concentration of Fisher Paykel Healthcare and A2 Milk at the top of the New Zealand market index.  These two companies makeup c.25% of our index and are both up almost 30% this year. 

This concentration compares very favourably with the Australian market which is down 21% this year.  This is due to its heavy weighting toward financial stocks (who generally suffer in very low-interest rate environments) and commodities (who will suffer from a long economic contraction).

In the US, the large tech firms have held up well as demand for their services has continued or grown through this downturn, though traditional companies have struggled.

There’ll be plenty of conjecture, both bullish and bearish, over the coming weeks about where this is all heading. As always, we’re very happy to be a passive investor, meaning we don’t have to play this high-stakes guessing game!


 

About kōura

kōura is a passive investor. That means we invest in the entire market rather than try and pick individual winners. This is a tested strategy that is proven to make you more money - and if you don't believe us, other well-known investors such as NZ Super and Warren Buffet also follow this proven strategy.

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