Please note this commentary is about investments so we have refrained from writing about the unfortunate human impact.
That impact is hard to quantify just yet. But we would be amiss to say that if shutdowns of countries and states are imposed for too long the humanitarian side of the equation could soon become a much bigger economic, political and social one.
With regards to investments and markets, the following are our observations and thoughts based on our experience as well as open discussions we have had with businesses, colleagues, economists, fund managers and stockbrokers.
We have seen a historical replica of markets crashing.
- Panic selling in stock markets at the start – this has been the quickest fall over 20% in history. Technology and various styles of traders have helped the exuberance.
- Cashing out of every other asset, even bonds and gold. Last week’s plight.
- Redemptions from (selling out of) hedged funds and other managed funds, forced by client’s panicking or needing cash because they were highly leveraged (in debt). An ongoing issue adding to market turbulence (volatility).
There are three clear actions to help everyone.
- Governments providing cash or other policy measures to support consumers and businesses (called fiscal stimulus) so that there isn’t a deep economic crisis. This is generally reactive and slow to take off. Our own government has acted much quicker than most peers.
- Central banks like our Reserve Bank of Australia, providing liquidity (cash) to markets so that there isn’t a financial crisis.
- Governments and World health organisations working on containment measures to slow the spread rate and vaccines to help those infected.
What has been done so far.
- Governments have slowly released their stimulus packages to help consumers. The evidence of this creates some positivity for consumers and clarity investment markets;
- Central banks are doing anything they can to keep companies and the economy afloat and liquid;
- Because of regulation changes banks, especially US banks, have worked to be much healthier (with regards to cash backing) than in the Global Financial Crisis; and
- Containment measure stages are really ramping up around the world and we probably haven’t seen the worst of that yet.
What we are aware of and watching out for.
We are bracing ourselves for substantial, but likely temporary, downgrades to companies’ earnings (circa 25%) as well as dividend cuts by at least 10%. We have eyes on corporate loan default rates over the next 6 months. However, the market looks to have mostly priced in that bad news.
This week has seen a little bit of joy for markets, stemming from the US Government finally agreeing on their stimulus and Europe taking further measures to add capital.
Looking ahead, we are mindful that stock markets tend to run ahead of time. Looking back on previous recoveries from a sizeable fall, markets start to head north before eventual company earnings upgrades by about 100 days on average.
However, saying all that, we don’t believe this is the clear bottom of the market.
There is too much imbalance in the global economy and no a clear sign yet of the virus spread rate slowing to call a definitive bottom for stock markets.
Therefore, we are not simply studying potential company earnings hits and economic data. We are looking for signs that the virus spread rates are slowing or have indeed peaked. Indicators of this being watched very closely are in Italy and the US especially.
We believe markets will be bottoming around that time the virus spread rate starts to slow down, even though by then the general global population will likely be feeling pain from the strict containment measures.
This brings us to the factor of time and what we can learn from the past.
We will get over this.
Whilst we might change the way we live in some ways, the extreme measures we are seeing now to stop the virus spread will return to a more normal way of life.
This time next year this crisis will most likely be behind us. Vaccines will hopefully be produced.
Economies will have started to ramp up again, hopefully with much less damage than if governments and central banks had not have taken enough action.
We also know from history, that after big downturns, market returns have tended to be much larger than average. Investing and rebalancing at these times of higher volatility has mostly translated into great returns over the following years.
Therefore, we must continue to think beyond the worst of the virus as our time horizons as investors are much longer. We must look beyond the unknowns as they appear today, in order to position portfolios for far longer than the next few months.
Our focus on your portfolio.
1. Take advantage of currency differences.
We believe the Australian Dollar (AUD) has fallen far enough. Last week it fell to 55 cents (versus the USD) at one stage.
We have experienced that these low levels of the AUD are hard to sustain as, already mentioned, global economies need to rebalance.
A simple example of this might be China continuing to add stimulus to their economy and encourage another boom of infrastructure spending.
This of course bodes well for the demand for Australian commodities. That buying pushes our currency higher.
At the same time the United States economy is a big ship to turn around. They could be affected by the crisis for a much longer period. Much like what happened during the recovery phase immediately after the Global Financial Crisis, money searching for a new home with better returns could pour out of the US where their bonds were seen as a safehaven asset. Thus forcing the US Dollar lower and commodity currencies like the AUD higher.
International investments – international holdings have mostly been in unhedged funds. Meaning, that the fall in our AUD has really helped performance over the years as it sank from $1.00, and especially in curbing larger negative returns in this current downturn.
Now, considering our view that the AUD should rise, we regard the tactical advantage of moving unhedged international positions to their hedged versions (to make the most out of our potentially stronger AUD) as a longer term positive.
2. Time and patience. Investing for the long term.
We also expect that by rebalancing and adding more weight to the growth side at some stage soon will hold portfolios in good stead for the eventual rebound in markets.
That is not to say we will jump straight up and make extraordinary changes. Rather, given volatility should remain for a while, we feel that continuing to invest in high quality funds and stocks at stages over the next few months will be beneficial.
No stock market crash is the same but they do have some similar characteristics.
On that basis we aren’t saying that the worst is over, but we are becoming more convinced that markets at least could be close to the bottom.
Whilst we realise this is largely an unprecedented crisis, we are closely watching events unfold to determine the right times to make changes.
We are firmly focused on adding the right value for the future because we have done this before.