MARCH QUARTER 2020 WRAP – A SWIFT, BRUTAL SELL-OFF
Mark Lister, 7 April 2020
The first quarter of 2020 was a brutal one for financial markets, and for investors. The COVID-19 outbreak morphed from a China story to a global pandemic, disrupting supply chains, causing shutdowns across numerous economies and leading to severe dislocations across markets.
The S&P 500 index in the US fell 20.0 per cent during the March quarter, its worst performance since the final three months of 2008, when US shares declined 22.6 per cent.
The local market also fell, although the NZX 50 held up much better than most, declining by a more modest 14.8 per cent. Despite finishing the quarter 18.9 per cent below the record high that was reached in February, the NZX 50 ended March just 0.5 per cent down from where it was a year earlier.
One reason for the better performance is the types of industries that dominate the domestic market, such as listed property, healthcare, utilities and infrastructure companies. The biggest areas of weakness in other regions have been the likes of energy and financials, of which the NZX has little exposure.
The NZ dollar declined against most major currencies, providing an important shock absorber for the export sector and offsetting falls in global equities.
Pleasingly, when these currency movements were accounted for, returns from global equities improved substantially. US shares for example, were down just 10.6% in NZ dollar terms, which saw them hold up even better than the local market.
Oil has been a major story during the first few months of 2020, with US crude prices experiencing the worst month ever during March, as well as the worst quarter in history.
Having finished 2019 at just over US$60 a barrel, prices collapsed by two thirds to around US$20 at the end of March. One reason was the expectation of much lower demand, as the global economy grinds to a halt amid shutdowns to limit the spread of COVID-19.
However, oil also suffered as a result of a price war between Saudi Arabia and Russia, as both nations try to grow and maintain market share. While lower oil prices are an obvious positive for many consumers and businesses around the world, the slump raises concerns over the positioning of some energy companies should prices remains at such low levels for too long.
Looking ahead, we expect the bumpy ride to continue over the next few months. A recession looms, but we don't yet know how deep it will be or more importantly, how long it will last.
Many economies face business closures, rising unemployment, and reduced household wealth as house prices and shares fall in value. This could leave long-lasting effects on some sectors (such as travel and tourism), and it could mean that consumer sentiment remains subdued for a longer period.
Opportunities are emerging within equity markets, so long-term investors should be beginning to take advantage of great companies that can be purchased at much lower prices than we have seen for some time. However, the next few months could be volatile, so patience is required and a staggered approach to putting capital to work makes sense.
Another important point for share investors is the fact that some companies are likely to reduce (or suspend) dividend payments temporarily. This is a prudent, sensible approach to take during a difficult and uncertain period, and it is preferable to being forced to raise capital at a deeply discounted level.
However, it means we should expect an 'income hole' of some magnitude across equity portfolios during 2020. For example, a balanced portfolio could generate approximately 10 per cent less income this year than we might’ve estimated before.
This will pass, but while it persists investors should maintain an appropriate cash buffer and be willing to eat into their capital where appropriate.