A Guest Blog by Graham Wingar, Financial Expert.
At the beginning of the year we would have seen opinions ranging from “COVID-19 doesn’t exist” to “The whole world is going to end”. Now with more understanding about the health effects of the virus and how it may impact the economy we can take a more balanced view.
As part of our quarterly investment update, I have given some insight into a couple of investment considerations for coming through and out of the COVID-19 pandemic.
“Markets recover as quick as they fall”
Whilst this may be true for many negative periods such as the banking crisis in 2008 / 2009, it would be naive to rely on that this time around.
The steep market decline early this year was a result of the pace at which the negative effects of COVID-19 were being realised. As many of the businesses that will undoubtedly and unfortunately fail as a result of COVID-19 are yet to cease trading, it will still be a long time until we peak in terms of unemployment and start to understand how quickly that unemployment can recover.
I believe that until the situation is more known, equity markets will then be able to be priced more accurately.
The public’s general willingness to go back to pre-COVID lifestyles shows an expectation that global productivity should be able to return at some point; when, however, will be dependent on information on levels of immunity and advancements in vaccines which will dictate the levels of business cessation.
The effect of the Quantitative Easing
Quantitative Easing is where central banks buy long term government bonds (loans to the government) back from the open market in order to increase the supply of money in the economy.
Typically, central banks would look to cut interest rates in the first instance to discourage saving and encourage spending both personally and corporately. As they have had very little scope to reduce interest with them being near zero, they have resorted to more Quantitative Easing.
Quantitative Easing, especially if overdone, can lead to increases in inflation. With interest rates at all-time lows this means a potential significant decrease in the real value of cash savings over time. For this reason, it is important to have investment solutions where the goods and services which are driving the returns are likely to increase in value as inflation increases.
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