What Covid has done for global investing

It’s just over a year since the big Covid sell-off in global markets, which was a response to the virus hitting Western countries.

john HeadshotsTRY sq John Berry 3 minute read

OPINION: It’s just over a year since the big Covid sell-off in global markets, which was a response to the virus hitting Western countries.

Rocketing Italian case numbers in February 2020 sent markets into a nose-dive. In international share markets, there was simply nowhere to hide.

Back in February 2020, most would have been stunned to learn the full extent of global lockdowns and fatalities that were to follow.

And as the market spiralled lower, most would have been stunned to learn the extent of the later recovery.

Markets initially sold off strongly, incredibly strongly. To their lowest point, a wide range of assets fell by around 30%, including shares in the US, UK, Japan, emerging markets, as well as tech stocks and commodities.

But as we now know the speedy market rebound was to defy gravity.

If an investment falls, you want it to recover in the rebound. Some not only recovered but jumped an extra 30 per cent or more, like shares in technology companies, emerging markets, Japan and also some commodities like copper, crude oil and silver.

What you don’t want in your portfolio is those assets that fell with the market and did not recover like UK, Spanish or Greek shares.

At the other extreme are a handful of investments that took off into the stratosphere.

Tesla shares were up 288 per cent. This remarkable result was in turn dwarfed by Bitcoin’s extraordinary 395 per cent rise.

The bad news continues for the share prices of some of the world’s largest tourism businesses like Carnival which operates ocean cruises, down 37 per cent.

And businesses linked to air travel continue to suffer with Boeing down 36 per cent, United Airlines down 35 per cent and Rolls-Royce down 52 per cent.

Yes, the expert forecasters and economists mostly got it very wrong.

One expert in March 2020 predicted the New Zealand dollar would stay below 50 cents against the US dollar for some time, while in fact it has swung the other way and rose to 72 cents.

The startling rebound can, in retrospect, be explained.

For a start, the US Fed and the European Central Bank added around US$8 trillion to their balance sheet over twelve months and forced interest rates significantly lower.

Unleashing that level of firepower wasn’t expected.

There was also trillions of dollars injected by governments with wage subsidies, increased infrastructure spending and financial assistance.

The Biden administration in the US is on the verge of approving another package of around $2tr.

A trillion of anything is simply beyond comprehension. To put it in context, a million seconds is twelve days, a billion seconds is 32 years, a trillion seconds is 32,000 years. That’s simply mind-blowing.

The stimulus staved off a prolonged global slump with experts now picking the US economy to grow +7.5 per cent this year.

The question for investors is if (or more likely when) will all this new money, spending and low rates drive inflation higher? We’ve already experienced it with property.

In a “normal” world higher inflation leads to higher interest rates which in turn leads to a contracting economy, job losses and a falling property market.

But it would be a brave forecaster to be that simplistic. We’ve learned over the year since the pandemic hit markets that our world is no longer entirely ‘normal’.

John Berry is co-founder and CEO of ethical investment manager Pathfinder Asset Management and ethical KiwiSaver provider CareSaver.

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