Share markets the world over have rebounded strongly after the unprecedented falls we saw in February and March. The key reasons for this are the enormous fiscal and monetary responses being employed by governments and central banks; and positive developments in the fight against COVID-19. For example a flattening of infection rates in many countries that were hit hard and the fact that dozens of vaccines and treatments are currently undergoing trials.
We have been surprised by the speed and strength of this rebound. For example at the time of writing the S&P 500 in the U.S. and the NZ50G have rallied 29% and 27% respectively off their March 23 lows. Year to date this puts them only 11% and 6% down respectively. To further emphasise the point the technology-laden Nasdaq 100 index is actually up for the year.
We think the rebound has been overdone - primarily for the following four reasons. First, entire sectors of the economy - especially tourism and hospitality - are facing a crisis that makes the GFC seem like a walk in the park. Unfortunately many companies will not survive. Second, the impact of the lockdown measures on economies around the world has been devastating. In the U.S. more than 22 million people have become unemployed in the last four weeks alone. Approximately the same number of jobs that were added since the GFC have been lost in a single month. Third, there remains huge uncertainty as to the path of coronavirus and sadly it is likely to have devastating impacts in developing countries which have densely populated cities and under-resourced healthcare systems. For example, on April 4 India reported 529 new COVID-19 cases. Two weeks later and that number was nearly four times as high. If this trend continues it is not hard to see how its healthcare system could be overwhelmed Fourth, notwithstanding improvements in new infection rates many countries are still struggling to really get on top of the virus and as a result are implementing new lockdown measures or extending existing ones.
For these reasons we have taken some recent profits. For example earlier this month we bought shares in the Auckland International Airport (AIA) capital raise that priced at $4.66 per share. Subsequently with the wider market rallying and investors gaining confidence in the strength of AIA’s balance sheet the shares raced higher. We decided to take profit above $6.
We are holding elevated levels of cash as we anticipate an opportunity to employ this cash at better entry points. We are also holding less foreign exchange hedging than usual as we believe the NZD is likely to head south temporarily alongside share markets.
It is quite possible that we have seen the bottom in share markets but just think this rally is likely to give back some of its gains in the short term.
We do not encourage our members to try to pick the tops and bottoms of markets by switching between growth and conservative funds. Rather we think it is best if you leave us to make adjustments to our funds for you.
As always thank you for your support,
The Team at Generate.