We understand many of you would have seen the incredible share market volatility during the last few weeks, which has seen trading days of up or down 10%. Overall share markets have experienced falls which appear to be a function of panic regarding the inability to model the impacts of Coronavirus containment on the economy and asset prices. Once panic sets in, rationality is hard to come by.
What is likely is that the global economy will fall into recession in the 1st half of this year given the economic impacts of containment. What is certain in our view is that the economic impact will be short-lived, with the virus having already passed its peak in China, and at this stage likely to pass its peak ex-China over the next 4-8 weeks.
How are we thinking about markets? Whilst panic has set in, we would urge you all not to panic. Selling assets following short sharp falls like those we’ve just experienced simply crystallises those losses. Equity valuations are now back to fair value or below in some regions.
Our clients hold well diversified portfolios containing quality holdings. We are in a position to ride out the volatility, remembering we have enjoyed strong returns over the last 11 years. We have received a number of enquiries about investing surplus cash now. Depending on your risk appetite, putting excess cash to work following a sharp drop in markets has historically proven to be fruitful. Yes, you might catch a bit more of the bottom, but it’s impossible to get it perfectly right.
Try not to get caught up in the hysteria. Ignore fake news and press fearmongering – in times like these, you get a good feel for those truly credible news sources. The best example of the fear in the general population appears to be the desperate need for people to buy and hoard large supplies of toilet paper! And most of all, stay safe, focus on your health and the health of those close to you.
We have included below a recent update from Dalton Nicol Reid (DNR), an Australian equity manager that we incorporate into some client portfolios to provide a view from an Australian perspective:
The market has reacted sharply over the past week as news of COVID-19 continues to dominate. The policy response has been to encourage social distancing to slow the pace of contagion. This clearly has a very negative impact on a range of industries (tourism, restaurants etc.) especially small business and on the economy. Concerns centre on the ability of certain industries (especially small business) to survive the revenue fall likely in the next few months.
To offset this impact, Governments and Central Banks are undertaking co-ordinated policies. These are a moveable feast at present. Governments appear prepared to do what it takes to support the economy through this period. The focus appears to be ensuring liquidity is available and we highlight the following policies:
While the impact on short-term company earnings has the potential to be material, the overall value of a company is not significantly impacted by the outlook for earnings over the next six months, but rather its future long-term earnings capacity. When the market is caught in the moment of uncertainty, the focus of market participants can shrink rapidly and we think it is a mistake to become too short-term in your thinking at this point. Old investor sayings of ‘buying when there is blood on the streets’ or ‘buying when others are fearful’ usually hold true. While clearly, news regarding COVID-19 has the potential to drive uncertainty and volatility, we are focused on the following:
Looking forward, interest rates will be low. Globally, stimulus will be strong and the peak fears surrounding COVID-19 may well be behind us. Equity markets have survived world wars, terrorist attacks and a GFC – a global pandemic, while no doubt a serious issue, will also pass in time.
The market sell-off has been very sharp and indiscriminate and we see this as providing a range of opportunities to buy good businesses at very attractive long term valuations.
The Australian equity market (as measured by the S&P/ASX 200) started the year off much like the previous finished, although most of the steam had been taken out of the rally with January producing a solid +1.20% return. February was much more muted with the uncertainty of an imminent reporting season hanging over the market however with better-than-expected results, coupled with softer-than-expected domestic inflation data, March provided some highlights as Australian shares hit new record highs. The quarter ended on a high with March producing +3.27% closing the quarter off with an attractive +5.53%.
2023 made for another very interesting year in investment markets as macro / regime driven events resulted in extreme shifts in investor sentiment on an almost monthly basis. Investors chose to shoot first and ask questions later in what can best be described as a year of maximum noise.
The Australian equity market (as measured by the S&P/ASX 200) started the September quarter with a flurry but ended up in the red as the global “higher-for-longer” narrative (interest rates) coupled with the ever-increasing cost of living concerns caused consumer confidence to wane.