Does that mean it’s risky to invest? Will markets fall again?
We’ve seen a fantastic recovery from the March market low. In some cases, prices are at or above their previous peak. Some business models have done very well from the crisis and we think their share prices can continue to be strong. Many other companies have suffered a gap in their revenue that will take time to recover or address. For this larger group it is harder for us to see recent price movements as fully justified. However, it is important to recognise that there are significant tailwinds supporting the markets: government stimulus, low interest rates and what seems to be a faster than expected reopening of the economy.
As some aspects of life return to ‘normal’ and restrictions continue to be eased, it is clear that the pandemic will have long-lasting effects on many aspects of life. The strong returns in the share market of the past two months are very unlikely to continue at the current pace and some indication of this has been seen in June with markets reacting negatively to rising coronavirus infection rates. The Reserve Bank of Australia (RBA) minutes released in June indicates their view that the pandemic as likely to have long-lasting effects and government support will be required for some time. Overseas central banks have a similar sentiment.
This leads us to the belief that the share market will be volatile for some time and may be susceptible to falls. However, with substantial government stimulus in place, and the Australian share market still not at its peak we are not expecting the ASX lows to be tested again, unless a 2nd wave of COVID-19 or additional lockdown comes into effect.