Here’s a conundrum: thousands of New Zealanders are losing their jobs, yet the NZX top 50 index is back almost to its peak of 12,065 it hit on February 20.
Opposition politicians say NZ is facing an economic disaster. As many as 150,000 jobs could be lost. The Reserve Bank believes unemployment will rise to 9%.
The sector which was the country’s biggest foreign exchange earner has been shut down. International education which brought in $5bn has also gone down the plughole. And all the government is doing is throwing billions at the problem in wage subsidies.
Of course there is relief that the country has succeeded in quelling Covid-19 under the leadership of Jacinda Ardern (for which she is admired around the world), and has moved to alert level one.
NZ has escaped the kind of death toll afflicting other developed economies like the US, Italy, Spain and the UK. The pandemic, which has swept the world, spread fear wherever it has struck. And the global economy is diving into a depression that may be more severe than the Great Depression of the 1930’s.
The Reserve Bank’s deputy governor, Geoff Bascand, said on TVNZ’s Q&A the “hard yards” lie ahead for NZ. There will be more business failures.
So what is it with investors as they put a real bounce into the sharemarket, which through the lockdown had plunged 30%, with fears many companies would not survive? Is it just relief that economic activity might not take as big a hit as some had predicted? Are investors mis-reading just what is happening across swathes of the economy? Or do investors believe Ardern can again work her magic?
The big retailer The Warehouse this week said it is cutting 1080 jobs (which Ardern says makes her “angry”). This follows Air NZ talking of 4000 job losses and Fletcher Building cutting 1000 from its workforce.
Hotels have been forced to shut down or maintain only skeleton staffs.
Many listed companies have suspended dividends. Others have raised fresh capital with deeply discounted share issues.
So how come the sharemarket is resilient enough to recover most of the ground it lost in March and April?
Canny investors who look at future earnings and prospective dividend yields would normally be sitting on the sidelines, awaiting evidence that the billions of dollars the government is pumping into the economy is not just sitting in the pockets of those to whom it is directed but is in fact stimulating the recovery.
Some authorities contend the market’s exuberance is being driven by index-tracking funds which have to re-allocate their investments as some companies drop out of the top 50 and others move in.
Finance Minister Grant Robertson has declared his primary objective in channelling a huge flow of government money back into the economy is “jobs,jobs, jobs”. His opponents insist there should be a broader plan to stimulate the productive sector.
Market price-makers, particularly fund managers, believe the money gushing out of the government’s coffers must find a home somewhere, and with interest rates offered by banks so close to zero, the better option is the sharemarket.
It’s OK for billionaires like the legendary Warren Buffett to play safe and sit on the sidelines until it becomes clearer whether the global economy can recover relatively quickly — or whether global sharemarkets can avoid an eventual crash.
Here in NZ investors have little option but to seize the moment and secure some of the gains the local bourse is offering.
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