The coronavirus impact on our investment decision making for you.
Prior to the recent coronavirus (COVID-19) outbreak we had expected global markets, led primarily by the US, to enjoy some economic benefits in the second half of this year.
Without going into the detail, we had expected the global investment and political environment to be easier to navigate and help us retain the confidence to continue to invest in growth assets deep into 2020.
This week we sit firmly in the reality that this won’t be the case.
The current pandemic combined with an oil price war has now posed a challenge to economies and markets for the remainder of the year.
Markets around the world are declining on fear.
Now that have witnessed the different ways COVID-19 has been dealt with, markets are running ahead of the likely economic implications of world-wide containment.
Containment is how China reacted to the situation, by locking down provinces and the movement of people. Hong Kong, Singapore and South Korea also approached it similarly.
The western world has been much slower to react, choosing the path of mitigation by slowly shutting entry into their countries and dealing with cases as they appear. The peak of the crisis in Italy is compounding fears that other European countries and the US will follow in similar suit.
Quite simply, people staying home or being asked to stay home for long periods is the major problem. This effectively shuts down economies (e.g. Italy has now only allowed chemists and supermarkets to stay open whilst the healthcare system is in disarray) and can potentially lead to social unrest if it is carried out for too long.
Adding to the fear is disappointment over the slower than expected reaction by governments, especially that of the US.
The initial thought was that developed world policy makers would be well in front of the situation, when now they seem caught behind.
In the last 24 hours we have seen a heightened response, especially by governments putting forward specific financial packages. Whether it surprises or not, Australia has been more proactive than many of our counterparts.
Two notable things have really set the fear in markets these past few days:
1. The compounding rate of those being infected is basically tenfold every 16 or so days. Meaning 1 million people outside of China could be infected by the end of the month. Without complicating it, the end worry is that there will not be enough hospital beds and the health systems around the globe will be stretched past their limits.
2. Mr Trump/the USA – The president of the largest Western economy (USA) has been slow to communicate further fiscal stimulus for the general public and businesses this week. It would seem to us they were also slow to contain inbound travel, especially from Europe, hence raising the roof on the possible compound rate problem.
Therefore when in fear or panic, everything is thrown out of the cot. In an investment sense, all assets are converted to the perceived safety cash.
It is important to remember the world’s financial system is still functioning.
This selloff in markets is not about workers or companies having borrowed too much. As in the financial system being under stress.
It is about the known unknown – the real test – how deep the economic impact will be.
Of course we have seen this crisis’ effect on closely tied industry such as travel, airlines, shipping, and oil. We wait to see how it affects everything else – workers, companies and day to day living.
What we do expect is certainly help from central banks and governments.
We expect that governments and central banks around the world will not run out of ways to overcome the economic problems. They will supply a lot of money in different ways to protect employment status and underpin private enterprise, the backbone of most economies. Interest rates here will definitely drop to 0.25%, maybe even less.
Indeed as I write this our stock market this afternoon has turned from being down 7% to being up nearly 1%. The Australian government is rumoured to have stepped in and bought back $2.5bn of government bonds, which adds cash back into our monetary system.
As the US Fed Chairman described this week, there are many actions that are needed to help in the crisis.
Central banks can cut rates and governments can add liquidity, but it doesn’t solve the health or the global supply chain grinding to a halt because of business shut down.
What rate cuts can do though is to give the economy some time. It can shore up business, household and market confidence, ultimately to avoid any critical economic collapse. That leaves more time to deal with the humanitarian effort.
We also expect help from lower oil prices for a big part of this year. Pumps simply can’t shut down and there will be plenty of supply for a long time. This certainly helps the pockets of us, as consumers, and any rebound in economic health.
We will be looking for the real effect.
We will be watching the behaviour of governments, organisations and industry that is needed to support the health and economic stability in this current crisis, such as –
- international collaboration,
- easing central bank policy,
- government action and economic stimulus,
- industry leadership,
- vaccine development,
- treatment acceleration, and
- social harmony.
These factors are our immediate focus. With today’s technology we are able to view indicators like traffic volumes and pollution levels for signs of countries returning to work. Unfortunately, today’s technology also allows for real time communication which can also breed hysteria, especially in the media.
Whilst we don’t totally ignore it we try to look through that noise to focus on the medium to longer term economic picture for investments.
Lastly and most importantly – Our focus for you.
We are well aware that the recent market moves provide good buying opportunities. However, while the quantifiable business and economic fallout is more unknown than known, we remain cautious but prepared to act.
- Your portfolio is Diversified, with cash and liquid investments. We will continue to actively diversify your investments. Defensive assets help to offset short term losses on share markets. Even as we stand today, year on year returns on an average balanced portfolio are positive. Around 3%-4% positive returns!
- We stay calm. We’ve gone through this before. Where are we now? Think even way back to where markets were after the 1987 crash. History shows that equities especially bounce back quickly from sudden events like this.
- We are staying invested. We are long term investors. Aside from holding cash as liquidity, our growth investment time horizon is well over 10 years.
- We will continue to look for quality investments. Our role is to work for you and manoeuvre to take advantage of pricing. Whether that is by direct investment or through similar thinking fund managers.
This note is meant to build confidence to help navigate this uncertain period, and to remember after all why we are working together.