The global community has been stunned over the events of the past several weeks, but rest assured, the world will keep turning and the sun will continue to rise each morning. This is the worst economic and health crisis we’ve faced since the 1920s and 1930s, but efforts are underway to develop and fast track a vaccine and curative treatments, saving lives is the priority.
To get back on its feet, the world needs to get through a lockdown period, which will require a supernormal effort from government – which is happening – before permanent structural damage is done and people lose their jobs. To this end, a lot is going to depend on the fatality rates in countries such as the UK, US and Australia that are at the beginning of the Covid-19 infection. Hopefully these countries will avoid the fate of Italy and Spain. Markets are going to be closely focused on the fatality and infection rates over the coming days and weeks, until a plateau sets in, as we’re finally seeing in Italy.
The collective governments around the world have announced unprecedented stimulus packages, designed to bridge the world and get business through to the other side of the shutdown. What governments do today to shield the global economy will help preserve businesses and jobs, and this is going to make a big difference on the other side. Like we saw in the GFC, more money will likely have to be printed via quantitative easing to shore up the financial sector and rebuild bank balance sheets, as borrowing from other governments is not going to be feasible and the public will have little appetite for bonds with yields at current levels.
Australian investors seem to have brushed aside the Morrison government’s additional $84 billion stimulus package announced over the weekend and instead are focused on increasing shutdowns across several sectors and states. It seems that the market is much more focused on the pain being endured by economies, rather than the medicine which is already being dished out in very large doses by governments and central banks. I think the latter will ensure that a good bridge is being built to the other side of the virus crisis.
In the current market environment, all assets classes have been sold down and portfolio’s will be impacted in the short term. Investors should have a long-term investment horizon to allow their investments time to recover. While portfolios are diversified among different asset classes, diversification alone does not eliminate the risk of short-term investment losses. Stocks can be more volatile than other asset classes but over the long-term they offer investors the potential for capital growth along with healthy dividend returns.
There are clearly pockets of extreme value in some of the biggest companies in Australia. History shows us that times of market crisis often present a tremendous buying opportunity for the brave.
When will markets find a floor?
Markets have bounced a few times after major announcements of policy support in the past few weeks, but on each occasion so far, the relief has proved fleeting. We think that monetary and fiscal support are necessary conditions for a sustained turnaround in markets, albeit not yet enough. That is because economic policy can do little to offset the near-term damage caused by shutting down large parts of the economy – its main function is to stop that hit from turning into a longer depression. A lasting recovery in markets is unlikely until we also see clear evidence that the global spread of coronavirus is slowing, allowing lockdowns to end. We see good opportunities emerging.
When the dust settles, investors will wake to the reality that the RBA has an official rate of 0.25% (at best) which means that deposit rates will be 1.25% (at best) which means that after inflation and tax, investors will receive a return of negative 1% (at best). Under this scenario there will be an inevitable migration out of cash back into equities. Reluctant at first, but inevitable in the end.
The time to panic has most likely passed. We need to look for stock opportunities and stay focused on long term returns. We also need to remember that the biggest and the best stocks will recover first, and this is not the time to be a hero and bet on stocks that have stressed balance sheets or a high cash burn.
For now, we must follow the advice from health authorities and do all that we can to help stop the spread of the virus. We’ll live between hope and fear for another few weeks, but eventually, we’ll get through it.
Source: Merlea Investments P/L 24032020