How the pandemic changed the equity market

A market crash reshapes economies and markets. The impact of the recent pandemic is still playing out in new and unexpected ways.

The COVID-19 pandemic created winners and losers on the share market. While some sectors are still struggling to recover and face significant uncertainty, others are surging.

But today’s winner is often tomorrow’s loser.

A look back at 2020’s dramatic market drop provides some timely lessons about the benefits of diversification that can ultimately help protect investor portfolios against the next shock.

What was hot: materials

After spending years recovering from the end of the last mining boom, the S&P/ASX 200 Materials index finally hit new heights. Aussie giants Rio Tinto and BHP grew by more than 30% year-on-year to May.

A key reason was surging demand from China for Australian iron ore, which pushed the commodity’s price higher. Meanwhile, iron ore exports from Brazil – the second-largest iron ore exporter to China behind Australia – slowed as it grappled with debilitating COVID-19 outbreaks.

Government incentives such as HomeBuilder also contributed to a property boom, which has also helped drive up the sector.

What was not: utilities and energy

With the economy locked down for long periods during COVID-19 outbreaks and wider macro-economic forces at play, demand for energy dramatically slowed. ASX energy shares dropped by more than 27% in 2020.

And while the sector has recovered from a sharp plunge in oil prices, by May 2021 it was still down by around one-third compared to February last year.

Australia’s utility companies suffered a similar fate. Demand for water, electricity and gas slowed and the sector dropped 16.1% last year. Shares in Australian utility giants Origin Energy and AGL dropped to their lowest levels since 2004.

What was on fire: technology

Global giants Amazon, Netflix and Zoom all experienced breakout years as stay-at-home orders and snap lockdowns forced people to switch physical activities such as shopping, entertainment, and work to the virtual world.

The Aussie information technology sector grew 57.8% last year, following the US tech-heavy NASDAQ index, which more than doubled within a year.

ASX market darlings such as Afterpay and Xero reached new heights, with the stocks ending the year 1119% and 146% respectively higher than their March lows.

More recently, the surging sector may have become overvalued, prompting a tech sector selloff early in 2021.

What was not, then hot again: consumer discretionary and financials

Consumer discretionary spending fell into a deep hole in the middle of 2020 as the recession took hold.

Unemployment soared and spending plummeted as shops, transport, and events were shut down.

People increased their savings until JobSeeker payments were doubled and JobKeeper business payments pumped up the economy.

The sector finished 2020 with an 11.3% gain, bouncing back from a 45% fall between March and April.

Similarly, the financial sector struggled amid concerns there would be mass defaults on mortgages and business loans. The sector finished 6.6% down for the year but has since grown by 17% in the first five months of 2021 as the economy rebounded and property prices boomed.

Diversification: preparing your portfolio for the unforeseeable

COVID-19 fundamentally changed almost every market in the world. But the performance of each sector was partly down to luck, given no one predicted a global pandemic or Australia’s faster-than-expected recovery.

This is why diversification should be a core strategy for all investors. It spreads out investment risk and ensures that all the eggs in your basket don’t break at once.

Holding one or two stocks – even blue-chips such as the big banks – increases investment risk. Even banks made rare cuts to their dividends as COVID-19 struck.

A more diversified portfolio could include dozens (or hundreds) of stocks diversified across sectors and geographies. Even more diversification can be obtained by adding different asset classes such as bonds, property, and less-common classes such as infrastructure.

A portfolio should also include easy-to-access sources of income such as cash, so you’re never forced to sell shares when a downturn strikes.


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