Why is the sharemarket strangely positive?

The NZX ticker. Photo / file

COMMENT:

The Herald's Cooking the Books personal finance podcast is here to get you the tips you need to weather the financial storm. Hosted by Frances Cook, with a new expert on each episode.

For those of us who follow the business news, there's been a weird split lately.

On one hand, businesses and economies around the world are getting absolutely hammered by the fallout of Covid-19.

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Even in New Zealand, which has far more freedom than most other countries, unemployment is expected to rise by the end of the year.

Yet when you look at the sharemarket it's strangely positive. It seems out of step with everything else.

In reality, there are good reasons for this split. Those reasons could have a big impact on your KiwiSaver or investing decisions.

When we talk about "the sharemarket" being up and down, it's always an average number.

Commentators might be watching the NZX50, the top 50 companies in New Zealand or, if they're overseas, maybe something like the US500.

The group result might go up or down, but within that, individual companies are telling very different stories. Healthcare and technology companies are doing well at the moment, whereas many retail or entertainment companies are having a terrible time.

And businesses that aren't doing well, are currently propped up.

Governments around the world are pumping cash and stimulus packages in a bid to keep things moving.

In New Zealand, the true test of how our businesses are going will come in September. That's when the wage subsidy ends, and it's likely the mortgage deferral scheme will end then too.

In fact, September/October is important globally, as many Government packages around the world are due to end around then.

Some may be extended, some may not, but that's when we'll get a better idea of how things are looking when governments aren't handing out cash hand over fist.

Another important factor is new investors rushing in to "buy the dip".

Now I'm not actually against this, as long as it's done carefully. More on that in a moment. But many of these new investors are flooding the sharemarket with cash, artificially pumping up prices, that could soon fall again.

The risk there is some are picking companies they deem "too good to fail", when in a recession actually anything is possible.

In fact, the spike in new investors hoping to make fast money even prompted the Financial Markets Authority to speak out in May, warning against people trying to make a fast buck, or diving in without doing their research.

Some companies on shaky ground have a share price that doesn't reflect reality.

Take Air New Zealand for example. When the Government agreed to prop it up, some new investors took that as a sign that the company couldn't fail, and piled in on what they saw as a bargain.

But a company falling over isn't the only way you can lose money. The Government could choose to ask Air New Zealand to repay loans by giving the Government a bigger ownership share. That would devalue any investment from other investors – aka, it could mean losing money.

I'm the last one to tell you not to invest just because things have become a little weird out there.

In fact, I'm still investing myself through all of this craziness.

But it's important to have a strategy that reflects the strange times that we're in.

On the latest Cooking the Books podcast, Kōura Wealth founder Rupert Carlyon said he was a big believer in diversification, which is buying several companies to spread risk, and a passive investment strategy to guard against the impulse to pick winners.

"I'm a strong believer that funds, and particularly passive funds, are a better way to get exposure to the sharemarket and get those returns.

"It's a great way to do low cost investing … and you get the diversification you need," he said.

"You want to be sure that for every $20 you're investing you're spreading it over hundreds of companies, and that's what a fund will allow you to do."

There are plenty of funds like what Carlyon mentions available through sharebrokers. Some will have tens of companies, others hundreds, others thousands.

If you pick something like the NZX50, it's equivalent to investing in that infamous "New Zealand inc", our economy itself, rather than just a couple of companies.

As I always say, an entire economy won't fall over - humans have a remarkable ability to dust themselves off and get going again.

But individual companies can and do fail, even the ones your least expect.

A strategy like Carlyon's means you can be on board for the gains from the successful companies, which should outweigh the losses from the failures.

Even if you can't predict which companies will fall into which category.

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