With the delta variant of the COVID-19 virus running rampant across Australia, the US, and the rest of the world – many investors may be worried about what it means for their ASX shares.
As Motley Fool has previously reported, economists at the Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group Ltd (ASX: ANZ) have warned Sydney’s lockdown will lead to a “major contraction in the Australian economy”.
But as Motley Fool’s own Scott Phillip’s has recently reminded us, the economy and the stock market don’t always move at the same pace – especially in the short term. Chief economist at AMP Ltd (ASX: AMP) subsidiary AMP Capital, Shane Oliver, agrees.
In a recent note, Oliver says investors in ASX shares (at least in the longer term) need not worry about short-term volatility. Let’s take a closer look at his comments.
“While shares remain vulnerable to a correction, the trend is likely to remain up.”
Why exactly are all the economic indicators pointing downwards while the share market, today excluded, is hitting record highs? Oliver sees 6 reasons why.
Firstly, earnings are strong. “US earnings have come in around 15% higher than expected,” according to Oliver. He says this trend has been the same across the globe, including Australia.
While it’s still early in the June half earnings reporting season, results so far have been stronger than expected with 79% of companies reporting earnings up on a year ago and a large return of capital to shareholders via increased or reinstated dividends and buybacks.
Second, the falling rate of the price/earnings ratio. This has resulted in higher earnings yields for holders of ASX shares.
“At the same time, the decline in bond yields has increased the risk premium shares offer over bonds. In other words, shares have become more attractive,” said Oliver.
Third, investors have learnt from last year that lockdowns don’t last forever. Once society starts to open up, the economy rebounds just as quickly. For example, in the US, the second quarter of 2020 saw GDP fall an astronomical 31.2%. The next quarter? GDP rose 33.8%. It has continued to rise in every subsequent quarter since – up 4.5% in Q4, 6.3% in Q1 2021, and 6.5% in Q2 2021.
According to Oliver:
This is partly because fiscal support protects businesses, jobs and incomes and combines with ultra-easy monetary policy to see pent up demand unleashed far more quickly than would occur coming out of a normal downturn.
The other reasons include the rollout of effective vaccines across the world, expectations of continued government stimulus, and anticipated further mergers and acquisitions with low borrowing costs.
What about ASX shares in the short term?
As we can see today, the share market isn’t completely immune to the world around it. At the time of writing, the S&P/ASX 200 Index (ASX: XJO) is down a mammoth 1.13%. Oliver concedes a short-term correction is a real possibility.
He lists the following as risks to ASX shares in the short term:
- Further outbreaks of the delta variant.
- The possibility of another strain of the virus emerging.
- A spike in inflation.
- A possibility of tax hikes in the US.
- Ongoing political tensions with China and/or a slowdown in Chinese economic activity.
Oliver sums up with these words for investors:
Ultimately shares prevail as investors look beyond prevailing uncertainties and bond yields eventually rise.
As long as the market can look beyond current uncertainties to something better, then it will.