Updated on 16 June 2020
By early June, many sharemarket indices were close to a full recovery from the sharp falls that were seen through March. In the case of the tech-heavy NASDAQ index of US shares, a fresh all-time high was set in early June. Then, on Thursday 11th, we got a reminder that it’s not a one-way street when it comes to sharemarket gains. We saw large dips of around 4-6.5% in the world’s major sharemarkets, and the biggest one-day falls since the COVID crisis took hold in mid-March. It’s difficult to pin-point an exact trigger for the financial market drop. The news wires were generally attributing it to both the US Federal Reserve’s cautious assessment of the US economy that was released prior to the drop, and fears about a possible second wave of COVID-19 infections in the US. It could just as likely be an overdue pull-back after the fast rise in stock markets over earlier weeks. US sharemarkets improved on Friday, gaining 1-2% of Thursday’s dip.
The financial market volatility we’ve been seeing over this year, including last week, shouldn’t put you off saving. The drop in March 2020 was very large, but the subsequent recovery over April and May has also been strong. Looking a little further back, the major sharemarket dip endured in late December 2018 was followed by an extremely strong year for investments in 2019.
The impact on your investment’s value during volatile times can help you understand your tolerance for taking risks, and ability to ride out periods of volatility in financial markets. In a similar vein, the strong recovery in markets and investment balances since March this year highlights the importance of sticking with well thought out, long-term strategies, rather than chopping and changing in an attempt to time the market. It’s important that the fund you choose is appropriate for your investment timeframe and savings goal. By taking the time to make sure you’re in the right fund, you’ll ensure that your investment has the right mix of growth and income assets to help you achieve your goals.
Updated on 25 May 2020
What’s happened and what does it mean for investment performance?
It’s hard to talk about anything these days without thinking about the impact of COVID-19, including in the investment world. But it’s worth reflecting that a little over five months ago, at the start of the year, share markets were pressing on to record highs, and a critical question for investors both here and abroad was “where to next” for interest rates (i.e. would they be going up soon). As recently as 12 February, our own Reserve Bank appeared very comfortable with its 1% Official Cash Rate setting, even though the news of the coronavirus in China was making headlines. The Reserve Bank of New Zealand (RBNZ) was not alone in its thinking. Global investors were confident, and their collective positive sentiment regarding the global outlook helped send share markets to all-time highs in February. As share markets rose, so too did the returns on investments.
From late February, the buoyant and positive situation changed drastically as the coronavirus went from a problem centred in a single region in China, to a global pandemic. Share markets that had been trading at record highs in February shed around a third of their value over late-February and March. The RBNZ and other central banks responded to the economic shock of the pandemic and associated lockdowns in March. They cut their respective policy rates to record lows and stepped into bond markets to provide liquidity and drive long-term yields lower. Governments, including our own, initiated massive support programs in late March and April. The low point in financial markets (and many people’s investment balances) occurred in late March, but since then we have seen share markets and bond markets recover, and investment balances recoup a significant proportion of the earlier declines. You can follow these links to view the latest returns for your investment in the ASB KiwiSaver Scheme, ASB Investment Funds, and ASB Superannuation Master Trust.
In early-May, New Zealand moved to Alert Level 2. If the move from Alert Level 3 was remembered for giving access to increased food choices (i.e. a break from our own cooking to a fast-food change), then the move to level 2 might be remembered as the chance to finally get a haircut. But on a more serious note, it meant that we made a positive step back towards a more normal life, with more contact with friends and family, as well as more people getting back to work and more businesses resuming operations. There’s still a long way to go, and a lot of challenges, but some encouraging signs are emerging.
Two big recent events were the 2020 Budget, and the RBNZ meeting in May. You can hear about them on our latest podcast here. The Government unveiled a massive spending programme to support the economy this month, and the RBNZ is also committed to keeping interest rates low by retaining the record-low 0.25% Official Cash Rate setting, as well as its upsized programme of Government bond purchases. You can follow these links to read more about ASB’s take on the 2020 Budget and the RBNZ actions.
It is encouraging to see that the strong responses from central banks and governments around the world and here in New Zealand are having the desired effects on economies. As we said in early May, we hope the low point for economic activity is behind us here in New Zealand and there is optimism offshore as some of the major economies tentatively re-open. Reflecting this optimism, share markets have been positive since late-March. At the time of writing, many of the major markets, including our own, are back to being within 10 to 15% of their levels in February, having been down by as much as 30 to 35%. Government bond yields are trading around record lows here and in many other countries, in a large part because of the actions of central banks. The lower bond yields combined with the share market recovery has been positive for investment balances. Investors that have checked their balances recently will notice a significant recovery from the late-March lows.
What should I consider?
We understand that it can be unsettling to see your investment balance change during times of volatility – but it’s important to remind yourself that it’s normal for share markets to go up and down. Historically, major share markets have always recovered – it’s when you make a hasty withdrawal or unplanned fund switch while markets are down that you tend to lock in losses.
As always, during times of market volatility, the best thing to do is think about when you’ll need to access your funds and make sure you’re in the right fund for your timeframe. Visit our blog for how to check you’re in the right fund.
We caution that there are still some tough months of news to come: labour market strains will continue, and unemployment rates are yet to peak. Second quarter company results will also reflect the shutdowns around the world and there are still risks of further outbreaks of COVID-19. With these risks in mind, over the year ahead ASB economists expect to see even more action from governments and central banks to support economies. Interest rates are expected to stay low for several years, and governments, including New Zealand’s, will run large deficits to support their economies. Businesses will need to raise capital and adapt, as we transition from crisis mode to the world post-COVID-19. A lesson from the Global Financial Crisis was that monetary and fiscal policy do work. The recovery in share markets reflects a sense of optimism about the future. That optimism is fuelled by the massive support from the government spending and central bank actions being taken right now around the world.
To keep informed on our latest thoughts on financial markets, you can read and sign up for our Markets Monthly updates here.
Updated on 1 May 2020
We are now into our first week at Alert Level 3 and New Zealand has been getting some attention and praise on the global stage regarding how we’ve responded to COVID-19. An economic contraction is occurring right now, but we continue to be both pleased and encouraged by the sharp drop and sustained low level of new daily cases being reported.
Our hope is that the worst of the crisis is now behind us in New Zealand. A successful transition from Alert Level 3 to reopen the economy is key. The expectation that this transition will go well (both here and abroad) is part of the reason markets have recovered over recent weeks. The following diagram shows the performance of key sharemarket indices in New Zealand, Australia and the US from 1 January 2020 to the end of April.