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Case made for share market optimism

Investment markets optimism

Certain signs emanating from investment markets show more optimism about shares is possible in the coming year, a senior economist has said.

A leading economist has observed some positive signs, and made the case for greater optimism, regarding investment markets in the wake of the downturns experienced as a result of the COVID-19 pandemic’s effect on the global economy.

AMP Capital head of investment strategy and chief economist Shane Oliver noted the recent trend in market volatility was something to be optimistic about.

While share markets remain highly volatile, the volatility is now both up and down rather than just down, and they have had two ‘better’ weeks despite very bad economic news,” Oliver said.

“After circa 35 per cent top to bottom falls, a lot of bad news had been factored in, which is partly why markets have been able to look through very poor economic data releases.”

He said there were some encouraging signs emerging from China’s economic activity as well.

The Chinese economy is gradually returning to normal, with daily activity indicators for traffic congestion, subway use, coal demand at power stations and property sales continuing to trend up,” he said.

“Reflecting this, China’s PMI (Purchasing Managers’ Index) rebounded to around normal levels in March, although this just appears to show that conditions improved compared to February rather than indicating that activity is back to normal.”

He warned these signs were a ray of light, but there are still many variables that could still cause disruption.

“Two risks for China remain a second wave from say imported cases or asymptomatic people and weak exports as the rest of the world slows. But the Chinese experience does indicate that there is light at the end of the tunnel if we are rigorous in implementing a shutdown and support businesses and people through it,” he noted.

He predicted a healthy outlook for shares over the coming year, but signalled a more negative experience for fixed income investments, which could result in wins for other asset classes.

“It’s still too early to say that shares have bottomed given the uncertainty around the coronavirus both in terms of the outbreak’s duration and its economic impact. But on a 12-month horizon, shares are expected to see good total returns helped by an eventual pick-up in economic activity and policy stimulus,” he said.

“Low starting point yields are likely to result in low returns from bonds once the dust settles from coronavirus.

“Unlisted commercial property and infrastructure are likely to continue benefiting from the search for yield, but the hit to economic activity from the virus will weigh heavily on near-term returns.”

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