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We are already into the third month of the year 2020, and investors seems to be losing confidence in the market, but enough of this crying eye’s out. There are always things on the optimistic side to explore, even in times when the market has adopted a downward trend, and ASX has plunged to the January 2019 level.
It was just last month on 20 February 2020 that the benchmark index S&P/ASX 200 rose to 7162.494 points defying all the odds from the then existing uncertainties in the market, including coronavirus. But as the coronavirus spread amplified, it took a toll over the international business, especially through travel bans. Investors became sceptical and low on confidence and this laid foundation for a historical sell-off from the investors.
How did ASX Perform?
On 12 March 2020, the benchmark index was down by 7.94% and settled at 5,304.6 with most of the sector indices tumbling down considerably by more than 5%. Even on Friday, 13 March 2020, the market started at a lower note with the benchmark index taking a dive of nearly 6% and the whole market drenching in a bloodbath.
The declining investor and consumer sentiments are evident from the Westpac-Melbourne Institute Index of Consumer Sentiment that dropped 3.8% to 91.9 in March from 95.5 in February amidst worsening coronavirus outbreak and an associated rout in financial markets.
A year ago, on 12 March 2019, the index was noted at 6174.823 points and touched its highest mark on 20 February 2020. The stock market defied events like bushfires and rallied around the new year to grow towards the end of January 2020.
However, the market further drove towards growth fuelled by investor confidence and spiking stock prices. Several stocks touched fresh 52-weeks high amidst earnings reporting season, driving more investment from the investors.
During the time of reporting season, the coronavirus had already set its foot in China, disturbing the normal growth of the country and silently crawled across borders to create a commotion for the global investors. With pockets emptied, confidence low and falling market sentiments, investors remain in a state of flux till date.
Initially, during the day’s trade on 13 March 2020, the market followed a downward trend but going through the day, the equity market made a rebound and ended in the green zone with a gain of 4.42% during the day and settling around 5,539.3 points.
Most of the sector indices also picked up during the day defying what was termed as the blood bath during the initial hours of trading.
The Game of Losses and Gains
The luring market that drove more money out of investors’ pocket into the market, now has shown very less signs of recovery as the stimuli package announced by the Government and the reduced interest rates by the RBA has failed to boost the investor confidence.
The glittering stock prices in the market only looked like flourishing further, but as has been rightly said “All that Glitters is not Gold”, the market failed to maintain the growth trend and has been riding down the hill.
A lot has happened over a very short period, damage to the human life, travel advisories and bans, games and sports events being called off, trillions wiped off from the market, businesses being shut down, the slowdown in economic growth, rollback of earnings guidance etc.
Lately, worries have started floating in the market about the Japan Olympics which are scheduled to take place this summer from July 2020. Moreover, projections are in place for a future slowdown in economic growth.
You have heard, read and learned a lot about how the markets have suffered, the slowdown in the business, and many more repercussions of the coronavirus pandemic.
Let us focus on something that got investor’s attention for good in times when they appeared like not paying heed to anything but sell-offs. Considered as a safe haven for investors; gold has been known as a major attraction for the investors in situations of economic slowdown and escalating anxieties among investors.
The features of gold that make it a special commodity to be benefitted in uncertain times are below:
The benefits of investment in commodities have been recognised by the investors long ago and through diversification and inflation protection have shown risk-adjusted returns to the investors. Moreover, gold has further outpaced broad-based indices, sub-indices as well as most individual commodities, by rising over the past five years where all sub-indices, including precious metals, have dipped.
Over the period of last decade or two, gold has also outpaced major commodity sub-indices and most individual commodities, out of which numerous have delivered unfavourable and negative returns to the investors.
What makes gold, GOLD?
Amidst a highly volatile market and benign economic conditions, gold tends to have a positive performance, and this has been noted during several events.
Performance of stocks, gold, commodities and VIX during periods of systemic risk (Source: Gold.org)
Investment in gold is seen as a more stable investment as compared to most individual commodities and broad commodity indices and is more stable than equities like individual stocks. Besides this, investment in gold offers portfolio enhancement through increased stability and enhanced risk-adjusted returns.
Also, investors prefer investing in commodities in times of high inflation through diversification since commodities have endured fairly through periods of high inflation. Maintaining the lead, gold has performed better than other commodities in times of high inflation.
On the other hand, when inflation was on the lower end, commodities have been found to deliver negative nominal returns, except gold that was found to report positive returns indicating high demand for gold in times of strengthened economic conditions.
Gold in the Current Scenario
As the current scenario has all the reasons for gold to shine brighter, investors have shown enough love for the commodity, making it reach high prices. With stock markets opening with a disastrous fall on some days and settling at a very low mark experiencing high volatility throughout the trading day, the gold prices did lose a bit, but solidified with lowering interest rates and jobs report.
The volatility index, S&P/ASX 200 VIX Index ended 84.23% up, by the end of the day’s trade on 13 March 2020.
Although the gold prices edged above USD 1700 per ounce earlier in the current month, the same has come down to around USD 1560 per ounce. It is likely that investors have sold gold amidst global equity sell-off to compensate for their loses in the portfolio.
Investors across the globe are in a split and are looking to cover their losses incurred amidst the global shakedown of the markets. Markets remain highly unpredictable as the ASX finally settled with a gain of 4.42% and the same had a bloodbath at its opening for the day on 13 March 2020.
Moreover, it was also reported by several media houses that the RBA has infused over $6 billion in the repo markets on 13 March 2020 in an attempt to stabilise money outflow as there has been a drastic sell-off in the AU bonds.
Gold, Yesterday and Tomorrow
Looking at the historical performance of gold, 2019 has been the best host for gold since 2010 as it rose 18.4% in US dollar terms last year, and outshone major global bond and emerging market stock benchmarks during the same period.
With falling interest rates and mounting uncertainties during 2019 like the US-China trade tussle and the US-Iran war, gold was seen as a safe shelter by the investors for their investment. As the uncertainties remained in place till December 2019 and fresh events like bushfires and coronavirus outbreak took charge, the appetite for gold was apparent throughout the year.
Similar projections are currently surfacing since the market is witnessing its worst times since the 2008 financial crisis. With no solid projections in sight regarding the end of coronavirus pandemic, many of the global dynamics are expected to be supportive for gold in 2020.
Amongst the many factors supporting gold in 2020, some of the factors can be
- Financial and geopolitical uncertainty coupled with low-interest rates
- Gold price volatility elevated through momentum and speculative positioning
- Structural economic reforms in India and China expected to boost long-term demand
To Conclude
The market recovery on 13 March 2020, reflecting a positive end to the week’s trading along with the stimuli package announced by the government might boost investor confidence over the weekend, and we might be able to see some more recovery on the next trading day as the market opens.
