Making the most of it might be smarter than trying to fathom reasons for the NZX’s big bounce-back

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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