There are very good reasons for the faith that investors are placing in equities markets.
News around the COVID-19 pandemic hasn’t been promising. New cases have shown early signs of stabilising, but it’s too soon to say we’ll see a dip in new cases. The world’s largest economy also remains under siege as the virus begins to take hold across many parts of the US.
Meanwhile, unemployment rates in the US1, UK2 and Australia3 are likely to reach levels not seen since the Great Depression, and while it’s not impossible for the situation to turn around before the end of the year, it’s far from certain.
Share market performance on the other hand has still shown some positive signs, particularly in the US, where the S&P 500 rallied nearly 5% through July4, with it now standing at more than 95% of its pre-COVID-19 level5.
This is an extraordinary outcome under the circumstances, and admittedly helped by the fact that the US market is dominated by tech stocks, which comprise over a quarter of the S&P 500’s market capitalisation. However, the same dynamic can be observed in markets around the world, with valuations seemingly indifferent to the COVID-19 chaos.
In Australia share market performance has been weaker compared to the US. While shares have rallied by 34% since the March low, equities are still down by 15% compared to their pre-COVID highs.
In saying that, there are some good reasons for the faith investors are placing in equities markets – these being the four big standouts:
There's a good chance of an effective vaccine by the end of the year
A number of promising vaccine candidates are in the final phase of testing6, with a large handful of others hot on their heels. The Oxford7 and Moderna8 vaccines are the furthest advanced and, if successful, could be publicly available by the end of 2020. Major vaccine producers are already manufacturing hundreds of millions of doses9 in the hope that they are proven safe and effective in mass testing.
Death rates in the US appear to be falling
Even as new cases continued to skyrocket through southern and south-western states in June and July, death rates in the US have been significantly lower than they were in the early months of the pandemic. There is obviously a lag in recording mortality as opposed to new cases, which is why deaths continue to rise in places like Texas and Florida, but at this stage it appears that as health services learn how to better manage the disease, the severity of the pandemic is waning.
Central banks have gone all out to shield their economies
We’ve never seen global monetary stimulus on this scale – low interest rates, quantitative easing programs, cheap financing for banks – policy makers are throwing the kitchen sink at the task of keeping their economies moving, and markets are responding with confidence.
There are no real alternatives
With interest rates at zero or near-zero across the world, share markets are one of the few places where investors can generate reliable returns on their investments at this point in time.
As such, current reduced dividend earnings look relatively attractive against record-low bond yields.10 The stimulus cash washing around the world’s economies needs to find a home somewhere, and for the moment investors are willing to overlook short-term systemic issues in favour of the longer term and hopes of a return to normality sometime in the new year.
Diana Mousina is a Senior Economist with AMP Capital.
4 Bloomberg, as at 31 July 2020
5 Bloomberg. Data period between 19 February 2020 and 31 July 2020.
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