Market Update – quarter ending 31 December 2020
2020 was a year that many will be glad to see the end of. True to form, its end was as dramatic as the start. We began 2020 with news of a novel virus in Wuhan, China and the subsequent lockdown of that city. Many commentators observed that there was no way the West would be able to conduct such lockdowns. We were soon to find out that New Zealand, among many other entire countries, could in fact be locked down completely. This set the baseline for the year in which we redefined what was previously considered possible and impossible.
World share markets reacted to the initial lockdowns by falling rapidly. For many countries, their sharemarkets entered “bear” territory (generally defined as a fall over 20%) in record time. The markets then staged one of the fastest recoveries in history on the back of some of the largest stimulus packages ever seen.
In the final quarter of 2020 we saw many countries, notably the US and UK, struggle to contain Covid-19. Mercifully, New Zealand has been spared any serious outbreak so far. We also saw a variety of vaccines created and approved in record time, and mass immunisation programs are starting worldwide.
On the political front we saw Labour elected with a majority – the first time in our MMP electoral system this has occurred. They have a strong mandate to take action as they no longer need to negotiate with coalition partners. The US election was as eventful as one would expect for 2020 – Donald Trump lost amid claims of vote fraud, and the Democrats have control of both the Senate and Congress. President Biden also has a strong mandate for change but now leads a heavily divided country. And for the finale, the UK negotiated an exit from the EU, finally concluding the ongoing saga that was Brexit.
2021 has seen sharemarkets continue to rise, with countries continuing to offer stimulus packages. For example the EU approved a €1.8T (NZ$3.0T) package and the US is proposing a US$1.9T (NZ$2.6T) package. Other countries continue to provide significant financial support too.
Although these are positive developments there are a number of areas of concern in 2021:
- For the markets, are the record highs a sign that a bubble is forming?
- Will the vaccines be effective against the various strains of Covid-19?
- With a number of vaccines being approved, will manufacture, distribution and administration of the vaccines by various countries be effective on a mass scale?
- Will relations between the major economies that impact New Zealand (US, China, Europe, the UK and Australia) remain on sufficiently good terms so that international trade continues?
Even with these concerns, there is more light at the end of the tunnel than we had during 2020. The vaccines are providing a path to recovery, the elections have delivered governments that have the ability to take action and the economy has proven resilient in spite of lockdowns.
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The information contained in this article is of a general nature only and does not take into account individual circumstances. It is not intended to provide comprehensive or specific financial advice. Before making an investment decision you should talk to your Britannia Financial Adviser.
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