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Why are markets rallying?
Australian shares have rallied to their best month since 1988, following 21 per cent falls in the month of March, as investors react to fiscal and monetary support.
Why are markets rallying?
Australian shares have rallied to their best month since 1988, following 21 per cent falls in the month of March, as investors react to fiscal and monetary support.
The message of “whatever it takes and more” from central banks around the world and lessons learnt from the previous crisis has led to a strong rebound in the market, which just two months ago hit a record high.
The All Ords has risen by 8.8 per cent during the month of April, following a 2.4 per cent rally on Thursday, taking back some of the losses for investors in March.
Fidelity International’s cross asset investment specialist, Anthony Doyle, believes the unprecedented fiscal and monetary response is causing markets to rally despite facing headwinds.
“Both professional and retail investors are perplexed as to how markets are rallying as we are facing an economic shock that is the worst since the great depression.”
“Well, the big reason is this technically liquidity and flow of funds we are seeing,” Mr Doyle said.
However, the fund manager believes investors should take caution despite the recent market rally.
“I would be [in a] more conservatively position. I think there are significant headwinds in the short term, and ultimately fundamentals will have a dampening effect on increases in risk assets over the course of the next 12 to 18 months.
“As we start to see on the corporate side earnings revisions, earning downgrades, as we see dividends being cut or stopped or entirely, as we see the true health of many companies balance sheet around the globe and domestically, I think this could shock the investment community, and it could see further declines in equity markets,” Mr Doyle explained.
The fund manager also believes that when investors read the broader economic news and see the impact globally the virus is having on economies, investors could change their position.
“Equally, when we start seeing the very bad news being printed in terms of the real economy, labour markets, potentially disinflation or deflation, I think that will also be very bearish for risk sentiment as well,” Mr Doyle said.
The investment manager noted these were only short-term impacts, with in the medium to long terms likely to see investors returns due to defensive assets like government bonds “never returning less”.
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