Coronavirus market analysis: equities outperforming

Thursday 30th April 2020 Justin Cleveland

Talk to any investor on the street, and they’ll likely share concern about share performance relative to the broader economy. A brutal earnings season is bearing this out all around the globe.

And yet, there are some areas that are defying expectations.

Altaf Kassam, State Street Global Advisors head of investment strategy and research says that investors seem to be pretending the terrible economic data, including the awful earnings reports, just aren’t happening. “At some point the market will wake up to the real effect of lockdown and a slower-than-anticipated return from it, when corporates start to fill in the guidance blanks with red ink and economic data doesn’t rebound in a crisp V.

“In other words, equities appear to be defying economic gravity and we suspect further volatility and weakness to come,” says Kassam.

Vanguard says ETFs doing well despite COVID chaos

Kassam’s perspective is born out by news that the Australian Exchange traded Fund (EFT) market did remarkably well, attracting a total of $3.8 billion in new inflows, the third-best quarter on record.

Vanguard reports that it was also their third-largest quarter on record with $1.51 billion coming in. Vanguard Asia's head of capital markets, Minh Tieu, said it showed investor confidence in ETFs during market volatility due to their diversification and low costs.

“In line with prior periods of volatility, ETF bid-ask spreads widened during the volatility as market makers adjusted their quotes to compensate for higher trading costs. The volume-weighted spread of Vanguard’s ETFs has been about four basis points since the elevated volatility began in late February, compared to the 2018 average of 2 basis points,” says Tieu.

He believes the March inflows were driven by opportunistic buyers due to the lower prices in Australian ETFs. “However, it’s important to reiterate that in times like these, investors should stay the course and maintain their focus on long-term goals as extreme volatility and market stress can test investors’ resolve.”

Vanguard was not immune to outflows in other areas. In particular, Australian fixed income and cash saw drops of $17 million and $190 million respectively. This despite strong performance from the ETF, returning 3.61 per cent.

There was also fluctuation in bonds, says Tieu. “It is normal and expected that the divergence between an ETF’s market price and NAV can increase, particularly for bond ETFs, during periods elevated market volatility and reduced liquidity, due to the nature of bond market pricing and the increased cost of liquidity in volatile markets.”

What’s to come for equities and fixed income

“The bottom line is that, with interest rates globally and in Australia at zero, it’s possible that FX volatility will be much lower, and UBS suggests more in line with equity volatility,” says Scott Haslem, Chief Investment Officer for Crestone Wealth Management.

“The latter point still leaves the Australian dollar vulnerable to any near-term equity market drawdown, if equity markets suddenly decide that, despite progress in containing the pandemic, that the damage to the economic outlook justifies a valuation discount to the market’s pre-COVID-19 highs!

“However, it may also mean the Australian dollar is less volatile ahead, and ‘FX markets should revert to more trending and less mean reverting [volatile] behaviour until there is more dispersion in global central bank policy rates,” says Haslem.

He also says not to hold your breath.

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