23 Jun Investing in a Post Covid-19 World
By Lance Dawber-Ashley, Financial Adviser – 24 June 2021
Covid-19 has affected all of us in one way or another. Naturally, we’ve focused on how it has affected the livelihoods, health and wellbeing of ourselves and the people around us, but it has also impacted investing and not necessarily in the ways we might have expected.
Back in March 2020 it became clear Covid-19 would become a pandemic on a scale that would infect hundreds of millions of people and lead to the death of millions around the world. Faced with the uncertainty of what lay ahead and no vaccine in sight, share markets did what they usually do it times of uncertainty, they fell sharply. In the case of the United States (using the S&P 500 index) the share market fell more than 30% by March 23 from its peak in mid-February. The drop in our local share market was similar.
No one could have predicted what was to follow; an immediate and strong rebound with markets looking through the near-term uncertainty in the hope vaccines would be developed and produced in record time (which they have been) and benefiting from the massive fiscal and monetary stimulus injected by governments and central banks around the globe.
Fast forward to June 2021 and we have many share markets around the world at or near record highs, and interest rates (which were already extremely low) at or near record lows. A surprise to many will be the strong rise in house prices over the last 15 months to record levels. Back in March 2020 a number of commentators were predicting a significant fall in house prices due to the “enforced recession” caused by the lock down of economies around the world. However, the combination of very low interest rates, a large number of expat Kiwis returning to the safety of New Zealand shores and lack of housing supply meant the opposite was the case.
So where to from here? Those investors who have traditionally preferred the safety of term deposits are hurting from low interest rates. Today, a 6-month bank term deposit is likely to pay interest at a rate of around 0.8% pa. Just 3 years ago, the rates of the day would have been close to four times higher at around 3.2% pa, and we have to go back well over a decade to see bank term deposit rates starting with a 5. The bad news is this situation is unlikely to materially change any time soon. The prognosis is not much better for fixed interest markets more generally albeit pockets of fixed interest such as credit markets may be relatively more attractive.
The strong growth in share markets since March 2020 has benefited investors who were prepared to accept the volatility that goes hand in hand with investing in such markets but share markets look expensive by many historical measures. That said, we need to consider how expensive share markets are relative to alternative investments. Given where interest rates and residential property prices are right now, share markets look reasonable.
Inflation is the wild card and while it has been low in NZ for a long time now, averaging just 1.5% pa over the last decade and at around 2% pa since the start of the 21st century, some of us will recall much higher inflation in the 1970s and 1980s peaking at close to 19% in 1987. I’m not suggesting for a moment we are in line for inflation of this magnitude (they were different times) but the by-product of the very stimulatory environment needed to combat Covid-19 and keep global economies ticking over could be higher inflation. That’s not necessarily a bad thing if inflation is transitory but if it becomes ingrained, we can expect materially higher interest rates down the track which could have an adverse effect on asset prices. That’s the debate playing out right now.
So, what are investors supposed to do? Well firstly, we don’t suggest trying to time markets. Those investors who cashed up in February/March 2020 fearing the worst from Covid-19 would have paid a heavy price by missing the sharp recovery. Secondly and boring as it may seem, create an investment strategy that is consistent with your financial goals and stick to it. Thirdly, make sure your investments are well diversified across assets and asset classes. There is no such thing as a free lunch when it comes to investing but diversification comes close. Finally, the reality for conservative investors is that returns from fixed interest investments are likely to be modest for the foreseeable future and that creates a dilemma to either stick with a conservative approach or to take additional risk in expectation of better returns.
There is a vast amount of information available to the public expressing views on investments and markets (some of it contradictory) which can be confusing and challenging to make sense of. Your investment decisions can have a material impact on achieving your financial goals. This is where a financial adviser can help. Do yourself and your investments a favour and get in touch with me for a no obligation chat, even if it is just to confirm you are on the right track!
Lance is a financial adviser with Saturn Advice with offices in Christchurch and Auckland. Lance can be contacted by calling 0800 757 858 or by emailing lance@saturnadvice.co.nz
The views expressed in this article are the views of the author. The information provided is of a general nature and should not be treated as personalised financial advice. A financial adviser can provide you with advice that is specific to your circumstances.