Share markets were plunging in the lead-up to level 4 lockdown last year, but this year investors have taken it all in their stride. Knee-jerk reactions to crises can be detrimental to your finances, and we believe many investors have learnt valuable lessons over the last 18 months. Taking a long-term view, ignoring the noise, and investing in the right businesses pays off over the long run.
Limited investor anxiety in level 4
The last time we had a nationwide level 4 lockdown was in March last year, and what a difference a year makes. In March last year, daily share market moves were dramatic, rivalling those we witnessed in the global financial crisis. Most global market indices fell 30% or more in the course of just one month. The re-emergence of COVID in New Zealand last month has caused much anxiety, and the resulting lockdown will take its toll on business, workers and mental health. While its impact on society is significant, its impact on financial markets this time has been muted.
This time around there has been almost no impact on our currency, bond market or share market. Individual investors also appear calm – with the absence of panicked client calls into brokers and fund managers. But this isn’t overly surprising, and markets only react violently when events are genuinely unexpected and likely to have a major financial impact. This time around, another COVID outbreak wasn’t that unexpected, and we now know that the long-term impact on many listed companies will be negligible.
Interest rate hikes pushed out by the Reserve Bank
While the impact on the New Zealand market has been muted (NZ share market up % and the New Zealand dollar largely flat against the US dollar), it has impacted the potential track of interest rate hikes.
The Reserve Bank of New Zealand (RBNZ) had been slated to increase the Official Cash Rate the day after the lockdown announcement. The lockdown fuelled uncertainty (and inability to put a timetable on reopening) means that the RBNZ has since elected to keep rates on hold.
This move clearly impacts savers, who had been hoping for higher term deposit rates and a better return on their hard-earned savings. Lockdown has therefore put more pressure on savers to look for alternative investments.
Foreign markets hint at a brighter future
Global investors are increasingly looking to light at the end of the tunnel. Vaccinations work. Despite the spike in delta cases, economic activity is holding up well in countries where vaccination rates are high.
As lockdown rules have been rolled back, employment has rebounded. Consumers are flush with cash - partly because they couldn’t spend on travel until recently - and partly because of generous government stimulus programmes in places like the US. Consumers literally have record cash balances and are now out spending. Even domestic travel volumes and hotel occupancy rates are back near 2019 levels in the US. As can be seen from the chart, even visits to shops and entertainment venues in Europe are almost fully recovered.
This has all flowed through to the corporate sector, and in the most recent US reporting season 85% of US companies delivered profits that were better than market expectations. The result has been share market indices – like the S&P 500 and Nasdaq hitting all-time highs.
Investors have learnt some valuable lessons
Over the last year we believe that investors have learnt some valuable lessons. They have learnt the damage that can be done by selling in the midst of a crisis. They have also learnt the value of having an investment strategy in place and sticking to it through thick and thin. A few brave souls have also learnt of the large gains that come from buying when others are panicking.
Overall, we hope investors have learnt the value of adopting a long-term mindset. Even when the near-term outlook is murky, we hope investors are now more willing to look through the noise. The returns you get in the share market are driven by the long-term success and growth of the companies you invest in. That won’t typically be that impacted by a short-term crisis like a pandemic.