The world is experiencing extraordinary changes in health, energy and geopolitics that will produce a significantly different world over the next decade. For investors, the ideal choices then will be very different from those visible now. Even so, investing success involves navigating a shrewd path from here to there, being aware of change without letting market ‘noise’ distract us from long-term advantages. At Perks we’re continually seeking ways to strengthen our edge in investment advice and we’re thrilled to welcome Christo Hall as Independent Chairman of our Investment Committee.
Since the global COVID-19 outbreak caused panic in financial markets in March 2020, there’s been a rapid investment recovery, fuelled by extraordinary government spending and low interest rates across the developed world and China. Growth assets (shares, listed property, infrastructure and commodities) generated very high 12-month returns from their lows. Yet defensive assets (cash, term deposits and bonds) gave minimal or negative returns due to rising bond yields since 2020, concerned the huge stimulus may trigger inflation.
Many clients of our Perks Accounting colleagues benefited from the Federal Government’s JobKeeper scheme. For some, it led to increased profitability whilst for others, it provided a lifeline to keep doors open and remain viable. Now that JobKeeper has come to a close, many of these business owners are preparing themselves for managing staff in a post-JobKeeper world, as outlined in the article we’ve included below, written by our HR Consulting colleagues at Perks People Solutions.
As investors, when approaching the tailend of an economic event, we often ask ourselves the same questions as business owners – what happens next?
How do we know when we are starting a new market cycle or just approaching the end of an old one?
In the case of COVID-19 – March 2020 signified the end of JobKeeper… so what did that mean for April – was this already the start of a new cycle or the end of one that was delayed by COVID?
Based on how a typical stock market recovery moves through the four emotional phases of Despair, Hope, Growth and Optimism, we can start to glean some indicators on where in the cycle we might currently stand.
The phase of despair can be seen in the initial sharemarket collapse, driven by falling company earnings and the lower prices investors were willing to pay for those earnings (P/Es). We now know, the COVID driven Despair only lasted about a month last year, eventually turning to hope.
The hope phase has been characterised by the anticipation that vaccines would corral COVID-19, allowing us to get back to normal. Share prices responded with a strong rebound over the last year, cheered by expanding P/Es.
The growth phase typically follows a rebound in profits, boosting sharemarket returns but a valuation contraction can create a partial headwind once the Hope phase exuberance dissipates. We may now be entering such a period of lower sharemarket returns almost entirely driven by rebounding corporate earnings. At such times, realistic stock valuation and the ability for company earnings to rebound will be critical.
Fortunately, we’ve just been through the best Aussie equities reporting season for decades as the profit upside resoundingly trounced ‘missed targets’ and FY21 earnings forecasts rose by record amounts.
In summary, we’re cautiously entering into the next optimistic phase as we look ahead. We’re optimistic due to sustained low interest rate stimulus and the vaccine rollout; but we temper this with caution since markets have done so well and may take convincing to pay for further rises. As always, diversification with a long-term focus is essential. The last year has shown the value of staying the course while we’ve considered the issue of diversification further in our ‘Setting up your SMSF for Success’ article.
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