Source: Netwealth, Bloomberg. Returns in US dollars from 31st December 2019 to 26th May 2020
Other reasons why equities appear resilient
Stock markets are typically forward looking and look for signs that company earnings will improve or at other initiatives that will foster a favourable environment for equities. Swift central bank action worldwide has helped to allay the fears of the market to some extent – borrowing conditions have been made easier and liquidity for many institutions is plentiful.
Further, this week has seen increasing signals that a range of Asian and European countries are progressing to unlock their economies. For the first time, this improving outlook has encouraged investors to look through the present situation to times when some of the most hard-hit sectors can perform again. As a result, it is only now that some market signs of macroeconomic confidence are starting to return, with the same technology stocks trailing the broader market very recently.
The proportion of UK shares held by UK-resident individuals was 13.5% at the end of 2018 (Source: ONS). Therefore, the majority of stocks are not held by private investors, but by institutions such as pension funds, insurance and investment companies. By nature, these organisations take a long-term view and are arguably less inclined to sell their holdings when markets are volatile or uncertain.
But like private investors they also seek the best risk-adjusted returns for their portfolios. The returns from cash and short-term bonds are not very rewarding now, especially after recent actions of the Bank of England, implying again that the volatility inherent in equities might be worth tolerating for better returns.
What this means for investors
While the current environment is undoubtedly more unusual and more troubling than most, we always advise investors to take the long-term view when aiming to achieve their goals. The average investor may receive less than half the returns of the broader market over time when they try and second guess the market, by missing out on the biggest days for returns.
While there may appear to be a disconnect between the behaviour of the economy and markets now, look beyond the headlines and we can see the wider stock market has suffered more when we extract the impact of the big tech companies whose prospects have hardly been dented. Indices which track smaller companies are even more depressed.
The only certainty is that uncertainty will be with us for quite some time. After the recent rebounds in markets, investors need to see some progress on both the health and economic fronts to see continued immediate gains. In the meantime, we encourage investors to be patient, and where they have the means, to stay invested.
Please remember that when investing your capital is at risk.