We have seen a roller coaster ride in investment markets over the last couple of months with a recent rebound.
The US equity market fell more than 34% from peak to trough this year, before rebounding more than 27%. In Australian dollar terms, the fall was only 25%, given movements in the Australian dollar. Therefore, being unhedged on currency for US equity investments, as Financial Keys clients predominantly are, assisted materially. The Australian equity market fell more than 36% before rebounding more than 20% more recently.
The sharp falls took place over a very short four week period. Initially, there was a supply shock with China being offline, before a demand shock with virus containment policies resulting in the closure of many businesses and industries, with almost half of the world’s population now in lockdown. Added to that, there was an oil supply shock following the disagreement between the Saudis and the Russians, which has resulted in the oil price more than halving.
Concerns regarding the trajectory of the virus and the length of time containment policies may be in place caused many non-advised and self-directed investors to panic and sell any investments they could get their hands on. Those that sold, then missed out on the rebound mentioned earlier.
Equity markets continued to sell-off into late March largely because many investors were flying blind when it came to ‘guessing’ the real level of company earnings given most companies had removed earnings guidance and a number had removed or deferred their dividends. Additionally, most company management and boards went into ‘lockdown’ mode themselves as they worked around the clock to assess whether they needed support, what support they needed, who would provide it, and how long that support would last depending on a range of lockdown scenarios.
Alongside this scenario, all are similarly flying blind from an economic perspective in terms of the potential fall in GDP growth (economic growth), the potential rise in unemployment, and how much of both are likely to be temporary rather than permanent.
It is hard to answer this question with conviction but in our view, it largely boils down to five main points of ‘optimism’:
At this point, this is really a guessing game as we are barely witnessing any kind of unity in the view and approach of leadership in a given country. Uncertainty remains given:
There is a balance between the likely cause for optimism that has resulted in markets rebounding (see the five points listed further above) versus the four relatively unknowns (listed immediately above) that markets are still grappling with.
We still believe in the following:
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The Australian equity market (ASX 200), although starting the quarter in good spirits and continuing to rally, driven by lower-than-expected inflation data and positive sentiment, witnessed an acceleration in market volatility due to various economic and political factors. This did not deter investors as the index made history on 17 July by surpassing the 8,000 mark and closing at an all-time high of 8,057. Off the back of positive momentum supported by optimism of interest rate cuts by the US Federal Reserve as early as September the benchmark delivered a strong quarterly return of +7.8%.
A new generation of just over 5 million Australians – born between 1965 and 1980 – are approaching their retirement years.
The Australian equity market (ASX 200), ended the quarter in the red (-1.1%). Higher than expected year-on-year core inflation readings flowing through from the March quarter attributed to the weak performance whilst market anxiety also increased at the thought of a possible rate hike - a long way away from the cuts that had been priced in earlier in the year and in late 2023.