OPINION: Eight months into 2020, we’ve seen extraordinary share market moves. The world’s largest market (the US) was down a third in March/April, then rocketed up by 51 per cent, reaching new highs by August. While unprecedented, this collapse and recovery is just part of the story.
The deeper insight is the wide dispersion of returns between sectors. Tech stocks are up 24 per cent this year – the likes of Amazon, Alphabet (Google’s parent) and Microsoft – have driven the market.
Healthcare, consumer goods and telecoms are also up – yet financial services, utilities, property and industrials are down, some sharply.
Wide return dispersion is also visible in New Zealand. Despite our market being up 8 per cent this year, it’s not plain sailing for all. The top end is Pushpay (+111 per cent), Fisher & Paykel Healthcare (+63 per cent), A2 Milk (+34 per cent) and Chorus (+30 per cent). The laggards have been hammered. Sky TV, NZ Refining, Vista, Air New Zealand and Kathmandu each down by half or more.
Driven by money printing
The market’s recovery is in a large part driven by central bank money printing.
Across the US, Britain, Europe and Japan, $5.6 trillion has been created this year. A trillion of anything is extraordinary. Consider this: a million seconds is 12 days, a billion seconds is 31 years, a trillion seconds is 32,000 years. It is mind-boggling how much money has been printed (our own Reserve Bank is also in on the act).
Printed money generally goes to buy government bonds. But one way or another it can find its way into investment markets. At first glance, it makes no sense to chase share prices higher, but it’s not completely irrational. Investing in shares with a 5 per cent dividend yield may seem more attractive than investing in government bonds or bank deposits with near-zero yields. But here’s a key investing lesson – returns are not the full story, relative risk is also critical. Yes, returns from shares are better than bank deposits, but risks are not the same.
Renewables are running
It has been a good year for investors with a lower carbon focus. US aviation stocks are down 47 per cent. US fossil fuel stocks (coal, oil and gas) have plummeted 35 per cent. Meanwhile, renewables have done well, with wind, solar and clean tech shares up 20 per cent to 70 per cent.
It’s not hard to explain renewables’ outperformance over oil. Oil prices collapsed forcing Shell to cut its dividend (first time in 75 years) and ExxonMobil to report losses.
They are not out of the woods, far from it. ExxonMobil is thought to need oil at US$70 (NZ$107) a barrel to break even, about double the current price. This in contrast to renewables companies, where new technology means ongoing efficiency improvements and lower costs. For investors, this is a challenge to compare vulnerable sunset industries with those dawning into a new era. What does this tell us about investing in 2020? It tells us the sectors you choose to invest in or to avoid are critical decisions.
John Berry is chief executive at Pathfinder Asset Management, and KiwiSaver provider CareSaver.