Don’t get blown off course by the market’s volatility
One of the biggest challenges in investing is to not get blown off a well thought out, long-term investment strategy by short-term cyclical swings in markets. And with the seemingly never-ending coronavirus pandemic and the avalanche of daily – mostly gloomy – news around, it certainly is a risk for many people.
2021 has already turned out very differently on the coronavirus front in Australia than what many would have been expecting at the start of the year. After last year’s relative success in controlling the virus, there was optimism that vaccines would clear the way for a sustained reopening and continued economic recovery.
It was on track up until around mid-year, with the recovery from last year’s pandemic-driven recession proving very strong. But since then, the arrival of the more contagious Delta variant has seen more than half of Australians spend months in lockdowns amid a race to vaccinate.
This, in turn, has set back the economic recovery with our Economic Activity Tracker, which combines timely weekly data, turning down again through the September quarter, consistent with a sharp slump in GDP. (See chart.)
It’s not just Australia, as Delta has also impacted the whole world, threatening the reopening. And the vaccines have not been as effective in protecting against the Delta variant as was the case with the original strain and their efficacy appears to decline over time, requiring booster shots.
Additionally, the disruption caused by the pandemic has resulted in supply chain shortages and higher prices, causing some to talk of surging inflation and stagflation.
But while it’s been rough – and depressing for many – there is reason for optimism.
First, the vaccines remain highly effective against serious illness. This is evident in the number of deaths in Australia running about a quarter of the level that would have been expected on the basis of Victoria’s wave last year. It’s similar in other more highly vaccinated countries.
Second, while Australia’s vaccination program got off to a slow start, targets are now being met, allowing a start to the reopening process.
Third, the process of “learning to live” with Covid may be rough, with a possible spike in new cases, resulting in the initial part of the recovery being slower than seen in last year’s post-lockdown reopening. But providing the vaccines continue to head off serious illness and timely booster shots are delivered, then pent-up demand will still see significant spending unleashed, which will spur a strong recovery through 2022.
Fourth, monetary policy will likely be easier as a result of the hit from the lockdowns and a slower initial recovery.
Finally, Australia will benefit from the cyclical recovery globally. While peak global growth will probably be seen this year with global GDP growth of 6% it’s still likely to be strong next year at 5%, as increasing vaccination globally allows a continuing reopening. Continued global reopening will in time see increased production and less demand for goods in favour of services, which should help reduce inflation pressures.
Shares remain vulnerable to short-term volatility. But looking through the short-term noise, the combination of improving global and Australian growth and earnings helped by more fiscal stimulus, vaccines ultimately allowing a more sustained reopening and still low interest rates augur well for both Australian and global shares over the next 12 months.