Covid-19 as 2020’s X factor for investment markets a surprise to nobody

This year picking the X factor may have been the easiest it has been in three decades, but there is a lot to learn from what just happened.

The selection of COVID-19 as the 2020 X factor was a no-brainer. In four months from late February, it caused a quick and deep fall in global GDP.

As each year draws to a close, I try to identify the main X factors that have influenced investment markets in those 12 months and then select the X factor for that year.

I’ve been doing it since 1982 — we tagged it as an annual special in this section back in 2007.

X factors are the largely unexpected influences that come from left field — we used to say out of the woodwork — to have a big ­effect on some or all investment returns. Their key characteristic is an element of surprise: if it was wisely predicted or anticipated, it’s not an X factor.

Being a fan of X factors, as I am, doesn’t preclude taking a view on where shares, interest rates, property, and exchange rates seem to be heading. But keeping X factors at front of mind prepares investors for the big surprises that, from time to time, seriously impact on their investment returns — and remind them of the need for sensible diversification.

The X factor in any year can be negative, as it is with COVID-19 in 2020 — and as it was in 2008 (the near-meltdown of the global banking system) and in 2001 (the terrorist attacks).

Or the X factor can be positive, as it was with the resilience of our economy in 2008 (the global ­financial crisis) and in 1999 (the Asian economic crises); in 1991 (with the lasting decline in Australian inflation); and from 1983 (when the X factor was the free float of the dollar).

When 2020 began, COVID-19 was a small and little-noticed blip in the eastern skies; but is now widely referred to as a once-in-100-years dominant event. The selection of COVID-19 as the 2020 X factor was a no-brainer.

In four months from late February, COVID-19 and the lockdowns and social-distancing that accompanied it, caused a quick and deep fall in global GDP.

Many people feared the recession would be deep and long-lasting. In March, sharemarkets panicked.

Mainly because of the huge easing in fiscal and monetary ­policies, the global recession is likely to be a good deal shallower and shorter than was initially feared (particularly if vaccines can soon be mass-produced); about three-quarters of total jobs lost in the US and Australia have been recovered; and despite the second wave in infections in much of the northern hemisphere sharemarkets have rallied strongly (average US share prices had, at time of writing, risen by 60 per cent since the end of March).

Every recession has its special features. One of them, this time around, is the unprecedented scale of policy stimulus and job support programs; and governments and central banks have committed to maintain highly ­accommodative policies “for as long as it takes” to ensure economic recovery.

Second, people dependant on interest earned on their savings are particularly disadvantaged by the near negligible interest rates.  Third, the pandemic intensified political divisions within the US, and added to the tensions between China and most Western countries — notably Australia.

Fourth, the COVID-19 global recession has been unusually uneven industry by industry. Revenues generated from travel, tourism, cafes, restaurants and entertainment was hit hard; but some online businesses, including many of the US tech behemoths, have thrived.

Fifth, working from home has became much more commonplace for many people.

Lessons for investors

The implications for investors include these lessons:

● Too many investors dumped holdings of quality shares at low prices during, or soon after, the panic of March. Too few used the crisis to buy quality shares cheaply, perhaps by way of averaging in. It’s never easy to take a contrarian, or counter-cyclic view, but it pays well.

● During the pandemic, many ­investors took the view that they would stay away from shares “until the worldwide recession ends”. Prospects are the global economy will pull out of recession in the next few months. By the time economic recovery has begun — and been recognised — sharemarkets probably will have priced in a lot of good news.

● The accommodative setting of fiscal and monetary policies will be with us for an extended time. There will be a lively debate on how to wind back the large budget ­deficits; and much hand-wringing on how savers can best adjust to low-interest rates.

● Inflation is likely to remain at near-negligible rates for a while. The next cyclic rise in inflation, when it comes, is likely to be mild — but will catch many investors by surprise.

To all readers of this column, I wish for you good health, good ­humour and good investing in the years to come.

Don Stammer is an adviser to StanfordBrown Private Wealth. The views expressed are his alone.

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