The second quarter in the global share markets was a somewhat puzzling time. A slew of bad news did little to hold back enthusiastic buyers chasing the S&P 500 for most of April and May with more normality returning towards June.
Bad news on the US economy was largely dismissed by Wall Street despite the US reporting its worst set of unemployment data since the Great Depression of the 1930s. About 20.5 million jobs were lost in April, pushing unemployment rate to 14.7%. June’s unemployment rate fell to 11.1% but was still much higher than February’s level of 3.5%.
The S&P 500 had by end of June recovered 38% from its lowest level seen in March 2020.
A reality check came in the form of the Federal Reserve Open Market Committee’s prognosis in June that the US economy is likely to contract by 6.5% in 2020 before growing by 5% in 2021; and the unemployment rate is expected to reach 9.3% in 2020.
What will continue to provide underlying support, for the US and the world markets, is the resolve between governments and their central banks to provide fiscal and monetary measures to keep their economies going.
The US Congress has been exceptional in how fast it has approved a US$2-trillion plan to boost its economy. Parts of Europe and China are among other countries that have made financial commitments to rebuild their Covid-struck economies.
In New Zealand, the government announced, among others, plans to set aside $50 billion to resuscitate the economy, including over $8 billion to support businesses and the self-employed, and $2.8 billion for those on benefits. New Zealand Treasury has plans for a $60-billion bond issue programme to fund the government’s economic resuscitation effort.
The big picture isn’t rosy. The International Monetary Fund (IMF) expects the world to see its worst economic recession since the 1930s. In June, the IMF’s forecast for global growth was -4.9% for 2020, and 5.4% for 2021. This means the 2021 GDP is a downward adjustment of 6.5 percentage points from the IMF’s pre-COVID-19 projections made in January 2020.
The silver lining is that the market already understands this, and as lockdown measures are lifted, economic activity will resume. A recovery in corporate earnings will help sharemarkets hold onto second quarter gains. The key risk remains a resurgence in Covid-19 infection rates, which will result in a slower economic recovery and lower returns for investors going forward.
In the June quarter, returns from international shares, after accounting for currency fluctuations, rose 12.2% in the June quarter. Over 12 months, returns were up 7.1%. (FTSE Developed All Cap Index in NZ dollar terms)
NZ equities returns, as measured by the S&P/NZX 50 Gross Index, rose 16.9% during the June quarter. This was the highest quarterly return ever for this index. Over 12 months, NZ equities rose 9% (S&P/NZX 50 Gross Index) despite all the volatility we have experienced this year.
Emerging market returns rose 19% in the June quarter but were down 3.2% over the year. (FTSE Emerging Markets All Cap)
Australian Equity returns, as measured by the S&P/ASX200 Total Returns Index rose 16.5% in the June quarter, reflecting the strong recovery in equities worldwide following the negative returns in Q1. Over 12 months, Australian equities fell 7.7%. (S&P ASX 200 Total Return Index)
International fixed interest/bonds
Returns from overseas bonds rose 2.4% in the June quarter but over 12 months, returns rose 5.7%. (Bloomberg Barclays Global Aggregate Total Return Index Hedged NZD)
Most fund returns rose over the June quarter in a market still dominated by Covid-led uncertainties. Over 12 months, funds saw a mixed set of returns.
SuperLife Income which does not have any exposure to equities, returned 3.36% in the June quarter and 3.45% over 12 months.
SuperLife Conservative, invested mainly in income assets, returned 6.17% in the June quarter and 1.12% over 12 months.
The SuperLife Balanced Fund (which typically has 60% in equities/listed property and 40% in cash and fixed income) saw returns rise 9.14% in the June quarter. Returns were down 0.48% over 12 months.
SuperLife Growth returns rose 10.41% in the June quarter. Over 12 months, returns were down 2.88%. The SuperLife Growth fund invests mostly in international equities, some cash and fixed interest.
SuperLife High Growth, mostly invested in higher risk assets such as equities and property stocks, returned 12.93% in the June quarter but over 12 months, returns fell 4.15%.
Ethica, which invests into funds that have strict sustainability criteria, returned 10.4% in the June quarter; over 12 months returns rose 2.76%.
Figure 1: Equities shrug off major losses, bonds stay flat