A phrase that gets bandied around a fair bit is “alert but not alarmed”. And that is the perfect way to be approaching the sharemarket at present with cases of the Delta variant of COVID-19 increasing across the globe.
COVID-19 case numbers are indeed on the rise. Researcher Worldometers has found that global cases numbers hit a trough near 360,000 in mid-June. Today, case numbers exceed 650,000. The concern by some investors is that rising case numbers could serve to derail economic recoveries with governments re-imposing restrictions on mobility. Indeed NSW and Victoria have been amongst the regions where lockdowns have been imposed.
But the big difference now compared with late April when global COVID-19 case numbers peaked is vaccination rates. In some countries like the US and UK, high vaccination rates have allowed economies to re-open.
Effectively countries have made decisions to live with COVID-19. These decisions by governments and health authorities have had to weigh up the economic impact, the impact on lifestyles and mental health of their population and the impact on health systems.
As we’ve seen since the start of the pandemic, governments have made different choices. And that will be the case going forward. But if immunisation rates continue to lift, more countries will be able to re-open.
For sharemarket investors, the transition to the “new normal” is an important development to watch. Nervousness about the transition may lead to a period of stabilisation for sharemarkets or periods of correction. The path is not known with certainty. More variants of COVID-19 could emerge. And the need for booster shots may be the next hurdle for governments and health authorities.
However, it is important to remember where we have come from. Economic stimulus measures made by governments and central banks have fundamentally supported businesses, workers and consumers. In fact, many Australian companies that recently reported earnings results have highlighted the strength of their businesses.
If governments and central banks continue to provide fundamental support until economic recoveries are firmly established and we are truly living with COVID-19, then there is no need for undue fear by sharemarket investors.
This is a whole new world for all of us. And the future pathway may change. But sharemarkets have navigated a difficult 18 months so far. So there are grounds for optimism.
But one thing investors will need to closely assess is how individual company fortunes are likely to change in the post-COVID world. Or perhaps more accurately, the ‘living with COVID’ world.
You are probably not alone in thinking the worsening spread of the highly contagious Delta strain will impact on share prices.
Yet the Australian sharemarket remains stubbornly resilient to rising COVID-19 cases and harsher lockdowns in Australia’s economic powerhouse, NSW.
So why is the sharemarket not falling like the March 2020 coronavirus crash?
Put simply, investors are looking through the lockdowns. Like previous lockdowns, there is an expectation that the economy will bounce back once restrictions are eased at the 70%-80% vaccination target.
However, there is no denying the virus will have an impact on the September quarter. David Bassanese, Chief Economist at BetaShares expects the Australian economy may contract by 2.5%.
The lockdowns may also give the Reserve Bank of Australia (RBA) an excuse to delay the previously announced reduction in the bond-buying programme in September. In turn, expectations for a rise in interest rates (the cash rate) may also be pushed out with the delayed economic recovery.
National Australia Bank continues to think that the RBA will not raise rates until 2024. In anyone’s view that is a long way out and suggests Australia will at the very least have the cash rate at 0.10% – effectively zero – for another two years. All in all, the lower-for-longer interest rate scenario is positive for the sharemarket valuation.
This leads us to the second part of the story, the August reporting period, and dividends galore.
As the August reporting season ends, the results on balance have been upbeat. According to FNArena’s Corporate Results Calendar, as at 28 August, 34.4% of stocks have beat analysts’ estimates, 45.6% have been in line and 20% have missed. Share prices have rewarded or disappointed investors accordingly.
CommSec reported that of all the ASX 200 companies that have reported full or half-year earnings to 23 August, $23.1 billion will be returned to shareholders via dividends, up 78% on the $13 billion of a year earlier.
BHP announced the largest payout in history at $US15 billion on the back of record iron ore prices.
Looking ahead, company boards are quiet on the 2022 earnings guidance, which is hardly surprising given the uncertainty around the virus.
The possibility of longer lockdowns, weaker commodity prices such as iron ore, or a fall in US stock markets could cause the Australian sharemarket to correct.
But for now, as the All Ords and the ASX 200 hover near record highs, investors will continue to enjoy the dividends on offer and look with a glass half full to an easing of lockdowns as vaccination rates climb.
Danielle Ecuyer is a full-time investor with over three decades of professional and personal experience in equity markets. Major Street recently published her second book, Shareplicity 2: A guide to investing in US stocks markets, following the success of her first book, Shareplicity: A simple approach to share investing.
Crashes tend to occur when investors are surprised by something. The unexpected or the “black swan” event is what triggers fear and financial protectionism among investors.
There are three reasons why I believe investors can be optimistic about the market over the next year or so, notwithstanding a temporary pull-back of 10%-15% is always possible and should be considered a normal part of every investor’s journey.
First, the worsening COVID-19 situation here in Australia needs to be balanced with what we are seeing overseas particularly in the US and Europe. In much of the northern hemisphere, economies are reopening as a high level of the population are vaccinated. Secondly, the extended lockdowns, restrictions and curfews in some Australian states will produce winners and losers and investors will look-through anything deemed temporary.
We know from the current reporting season, for example, that discretionary retailers have had an amazing 2021 financial year but sales growth, with so many stores shuttered, is negative in the first two months of 2022. Once restrictions ease, however, as we said last year, things can bounce back very quickly and investors can miss the big share price rerating that occurs when we reopen. Consequently, investors are more reluctant to sell even if a company is going through temporary challenges.
Meanwhile, other companies are doing just fine. Companies such as data centres, are enjoying structural tailwinds that mean their success is not dependent on COVID-19 or the state of the economy.
With so many companies doing well, it makes it difficult for the market, in aggregate, to crash. And in any case, if the market did crash it would just make these higher-quality prospects cheaper.
Finally, any negative impact on the economy will inspire central banks and governments to offer support through lower interest rates and handouts respectively. It seems to me central banks globally are focussed very much on ensuring economies remain stimulated and asset markets, including the stock market, remain supported.
A falling sharemarket or property market can severely damage consumer confidence, which can undermine the efforts of central banks and governments to keep growth ticking along. It is therefore in their interest to keep fear from taking hold.
Earlier this year, it was feared inflation would roil markets and yet here we stand, with more inflation this year than we have seen in many years, and yet interest rates remain historically low and stock markets elevated.
Provided there is light at the end of the tunnel any worsening of the current COVID-19 situation is unlikely to inspire a crash. There’s just one caveat. If we don’t get everyone vaccinated quickly enough globally, we inadvertently provide more hosts for the virus to mutate and potentially morph into something that undermines or evades the current crop of vaccines. That would be unexpected and therefore negative.
Cover image source: StreetonCamara/Shutterstock.com
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