• Three reasons why I am still bullish on the market. Read here.

Are we likely to see a correction or crash from the COVID-19 situation?

13092021_correction or crash

Are we likely to see a correction or crash from the COVID-19 situation?

Crashes tend to occur when investors are surprised by something. The unexpected or the ‘black swan’ event is what triggers fear and financial protectionism among investors. There are several reasons why I believe investors can be optimistic about the market over the next year or so, notwithstanding a temporary pull-back of 10-15 per cent is always possible and should be considered a normal part of every investors journey.

First, the worsening COVID-19 situation here in Australia needs to be balanced with what we are seeing overseas particularly in the US and Europe. In much of the northern hemisphere, economies are reopening as a high level of the population are vaccinated.  In the US leisure travel has almost returned fully to levels prior to the pandemic. In the UK restrictions have all but been extinguished and while infections rates have risen hospitalisation and deaths rates have remained immaterial.

Secondly, the extended lockdowns, restrictions and curfews in some Australian states will produce winners and losers and investors will ‘look-through’ anything deemed temporary.

We know from the August reporting season, for example, that discretionary retailers have had an amazing 2021 financial year but sales growth, with so many stores shuttered, is negative in the first two months of 2022. Meanwhile margins are under pressure as retailers roll out more aggressive promotions to move stock amid an environment where most consumers have bought pretty much everything they needed in the last lockdown.

Once restrictions ease however, as we saw last year, things can bounce back very quickly and investors can miss the big share price rerating that occurs when we reopen.  Consequently, investors are more reluctant to sell even if a company is going through temporary challenges.

Meanwhile other companies are doing just fine

Many companies with stores and sales overseas are doing just fine, and others, such as datacentres, are enjoying structural tailwinds that mean their success is not dependent on COVID-19 or the state of the economy. With so many companies doing well, it makes it difficult for the market, in aggregate to crash. And in any case, if the market did crash it would just make these higher-quality prospects cheaper.

Finally, any negative impact on the economy will inspire central banks and governments to offer support through lower interest rates and handouts respectively. It seems to me central banks globally are focussed very much on ensuring economies remain stimulated and asset markets, including the stock market, remain supported.  A falling stock market or property market can severely damage consumer confidence, which can undermine the efforts of central banks and governments to keep growth ticking along.  It is therefore in their interest to keep fear from taking hold. Earlier this year, it was feared inflation would roil markets and yet here we stand, with more inflation this year than we have seen in many years, and yet interest rates remain historically low and stock markets elevated.

Provided there is light at the end of the tunnel any worsening of the current COVID-19 situation is unlikely to inspire a crash. There’s just one caveat. If we don’t get everyone vaccinated quickly enough globally, we inadvertently provide more hosts for the virus to mutate and potentially morph into something that undermines or evades the current crop of vaccines. That would be unexpected and therefore negative.

INVEST WITH MONTGOMERY

Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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