COVID-19 and the global stock markets - is the worst behind us?

3 min read

Share markets have continued to recover from the losses we experienced in March, although we're yet to see certainty and confidence at pre COVID-19 levels return.

Investors may benefit from remaining patient with their medium to long-term investment strategies and ensure their portfolios are well-diversified to prepare for any future volatility.

As lockdown restrictions have eased, share markets have responded positively.

Sentiment has been boosted by the record amounts of monetary and fiscal policy stimulus provided by governments and central banks around the world, along with potential vaccine developments and opportunities arising from changing societal preferences.

Similarly, recent economic data in Australia has also been better than expected with the unemployment rate and GDP figures not as dire as initially anticipated.

Investors have taken this on board and appear to have discounted this year in terms of economic growth, instead focusing on a recovery in 2021.

The worst feels like it’s behind us… for now.

While we as a country prepared for more significant falls in economic activity over the second half of 2020, the true impact of the economic shutdown is still to be revealed.

But over the medium term, financial markets tend to be driven by where we are in the economic cycle, but this isn’t a normal cycle. The last cycle ended abruptly with global policymakers prioritising the protection of public health above immediate economic concerns. The huge spending programs can’t carry on indefinitely and as they come to an end, it’s hoped economies will pick up where they left off. However, the disruptions to supply chains and employment suggest there could be longer-lasting economic damage that will weigh on the growth potential of our, and other global economies.

What lies ahead?

Our longer-term views focus on the evolution of three key themes, which reinforce the case for maintaining a broadly diversified investment portfolio.

Slower potential nominal growth levels

COVID-19 brought about significant increases in the size and scale of government debt programmes.

The current support to Australia’s economy is almost 10% of GDP, while in the US it will exceed 19% of GDP for 2020. This increase in government debt is a global phenomenon, with the deterioration in debt-to-GDP ratio most severe in Europe.

Substantial debt burdens impede governments’ flexibility to provide long-term stimulus and support. So, how economies respond to the increased debt burdens will likely define the strength of future growth.

Low inflation and interest rates

Historical downturns have led to weak demand and high unemployment, and consequently lower inflation. It’s difficult to quantify the full implications of the current pandemic on inflation, as we’re likely to see impacts to both supply and demand.

In the short term, we see a trend towards deflation, given the substantial disruptions to consumer-led industries such as services and leisure, and the collapse in energy prices.

Longer term, much will depend on capacity as we’re likely to see consolidation within the private sector, where weaker businesses won’t survive. Wage pressures and employment mobility trends also have a role to play, potentially influenced by the attitude and behaviour towards ‘saving’ rather than ‘spending’ for both households and companies. Growth and income will remain scarce for investors.

Not dissimilar to the environment we faced after the GFC, the current low growth and interest rate outlook will support ‘growth’ companies with strong balance sheets and stable earnings. But we expect ‘value’ companies to struggle, as investors look for companies that can offer growth and income to deliver better investment returns.

It’s anticipated large global conglomerates in the US and Europe, such as L’Oréal, GlaxoSmithKline and Nestle, will drive share markets forward. An emphasis on Environmental, Social and Governance (ESG) integration is also likely to favour those companies with flexibility in their balance sheet and technological capabilities, who are better able to operate in an environment of lower profit margins.

Portfolio implications

Focusing on the evolution of this pandemic can provide insights into the confidence levels of governments as they move to re-open their economies.

The risks and longer-term implications are challenging but not unwarranted. A return to business activity, falling global interest rates and enormous stimulus all provide necessary support.

Many of the challenges investors have faced since the GFC remain and highlight the need to continue to develop a well-diversified portfolio across asset classes and investment strategies.

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This document has been created by Westpac Financial Services Limited (ABN 20 000 241 127, AFSL 233716). It provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. Projections given above are predicative in character. Whilst every effort has been taken to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The results ultimately achieved may differ materially from these projections. This document may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, Westpac Financial Services Limited does not accept any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, Westpac Financial Services Limited intends by this notice to exclude liability for this material.

Information current as at 15 June 2020. © Westpac Financial Services Limited 2020.