It has been a little over 12 months since the coronavirus shut down the world, in turn driving the deepest economic downturn since World War II and the fastest equity bear market in history.
At the time, with no precedent in dealing with a global health crisis, fear and risk-off behaviour was magnified as governments around the world implemented social restrictions and rushed to close borders.
Expectations of the size of the economic and financial market impacts were hastily made when the fear factor and level of uncertainty was at its highest. Predictions of house price declines of 20 per cent were commonplace as were fears that the economy, corporate earnings, dividends and the labour market would take years to recover to pre-pandemic levels.
Of course, with the benefit of hindsight, we now know expectations were almost universally too pessimistic. In fact, the Australian economy, which dropped perspicaciously in the second quarter of 2020, was bouncing back by the third quarter. The equity market reached its lows only 43 days after peaking and has been rising steadily ever since.
It is safe to say that Australia’s economic and equity market recovery has exceeded expectations at very nearly every level since mid-2020 as a result of extraordinary levels of fiscal and monetary policy support and relative success at containing the virus.
If history has taught us anything, it is that you must address the root of the problem before financial markets and economies can form a sustainable bottom. For a health crisis, it meant containment of the virus. For the resulting economic crisis, it meant enough policy support to limit the damage.
Thankfully, Australia had the right response for both and built a bridge to the other side of the crisis until a vaccine emerged.
But while the economy has recovered faster than imagined, and the equity market has looked through the downturn as only a temporary blip, there have been some lasting implications for the economic and investment landscape.
COVID-19 induced lockdowns and social distancing requirements have been the catalyst for a number of permanent changes in working and consumption habits. Remote working raised the need for home based technology such as Zoom and access to online offerings such as Red Bubble and Temple & Webster.
This was at the expense of more traditional office-based requirements including floor space and commuting requirements.
Those technology providers that were focused on productivity tools, telco access, e-commerce and logistics were all short term winners, but are also likely to continue to benefit in a post COVID-19 world as well.
The potential for a reopening of international borders (even if through travel bubbles and vaccine passports) is likely to help underpin the upside in more cyclical areas such as travel and leisure, gaming, hotels, and real estate.
However, it is important to distinguish between cyclical and structural shifts as we look forward. While the equity market is excited about the potential for further value versus growth stock performance, it is unlikely that this is more than a cyclical upswing that will begin to fade as economic and earnings growth normalises.
Perhaps one of the most positive developments out of the past 12 months has been how COVID-19 has accelerated the importance of ESG investing as social factors finally rose to the same level of importance as good environmental and governance practices.
Worker safety and wellness, workplace flexibility, diversity, inequality and governing compensation are now all at the forefront of corporate behaviour. It only took a global pandemic to get there!
While the pandemic has been tragic in terms of the loss of lives, it has been the catalyst to align corporate and investor preferences with wider social issues and commitments such as climate change – which will have lasting impacts on how and where to invest – as well as the health and wellbeing of the planet.
Once again, we are reminded of the durability of economics and the adaptability of corporates and consumers in adjusting to changing circumstances.
Investors are also reminded that COVID-19 has brought on the future of work and consumption at a much faster than expected pace and this will have lasting impacts on where to invest.
Quite simply, there has never been a better environment for active investors and stock pickers and as an active investor, the current market conditions are ripe with opportunities.
This article was originally posted on The Australian Financial Review here.
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