If western governments were slow to the looming public health crisis last month, few seem prepared to make the same mistake with their handling of the economic fallout from Coronavirus.
Policy action is afoot by governments & central banks to provide support to the financial markets, the economy and business.
This week financial markets have seen unprecedented stimulus from all corners of the world.
In Australia yesterday, the RBA threw their weight behind the banking sector, providing $90bn in guaranteed financing and a promise to support the government bond market with a target to keep Australian Government 3-year bonds at the cash rate of 0.25%.
We should expect to see the Federal Government follow up this weekend with a sweeping fiscal package aimed at temporarily curing failing cashflows faced by individuals and small businesses in the wake of mass quarantine measures.
In Spain and the UK, governments promised massive ‘wartime-like’ spending to the tune of 15-20% of GDP in response to this unprecedented cessation of economic activity.
Mortgage and utility bill moratoriums and expanded welfare benefits have been tabled as well as direct lending by the Bank of England to small businesses.
The ECB followed suit with a EUR 750bn bond-buying package that for now at least seems to have defused investor concerns over the state of Italy’s spiralling government debt and the threat that it could take down much of Western Europe’s banking system with it.
In the United States, concrete plans are yet to be confirmed but again appear to be of significant magnitude and involve potentially over US$2T in spending and direct cash payments to households as soon as April 6th and then again around May 18th.
These efforts should be applauded and will go some way to bridging the cash flow gap to when economies begin to resemble normality.
However, in the near term, cash will be king so long as we remain in some semblance of lockdown as activity and spending remain restricted. Until we see a sustained peak in the spread of the virus, we expect volatility to continue and will continue to take a cautious position. The outbreak will end and we expect a rebound in both economic activity and markets when it does but there is currently still too much uncertainty around when the outbreak will be controlled in Europe and the U.S. to take a convicted view.
So What Are We Doing?
Whilst we have been fortunate to have been defensive in our posture for some time now, it doesn’t make life any easier.
Losing less money than your neighbour is hardly a cause for celebration.
Portfolios are under significant strain and even many good quality business models and assets are buckling under the concentrated liquidity pressure.
Small and mid-cap equities have underperformed large-cap stocks by over 10% year-to-date which has hurt Australian equity performance, but our long-term advocacy for international shares relative to the stock-market has paid off in spades with offshore markets down only half that of the local index (-13% vs -27%).
On the defensive side of the portfolio, our focus on local investment-grade credit and Australian mortgage lending have also largely protected the portfolio, but again, market forces have understandably taken prices in our few listed investment trusts and hybrid holdings lower.
Whilst corporate credit and equity markets have born the brunt of investor selling, the flow-on effect is set to hit commercial and residential property markets imminently and many of the supposedly secure cash-flows packaged up as diversified income will prove to be far less secure.
Our focus on Australian property debt in recent years stands us in excellent shape even in the facing of falling property values.
Again, our exposures on the property equity side have been to the less racy end of commercial property with low gearing a feature of our fund holdings, long-term weighted average leases and or exposure to A1 tenants such as NAB or government entities.
In the land of the blind, the one-eyed man is king they say, but it sure doesn’t feel like it.
For now, we will retain our defensive bias.
Australian equities have underperformed the local bond indices by -35%, but until we see a peak in confirmed coronavirus cases in major European countries and the United States, buying growth assets seems a pointless task.
In re-shaping the portfolio in the weeks and months to come it is possible we lighten holdings in our oil equity positions as the demand destruction from travel restrictions will be enormous.
It is likely we will diversify further our defensive exposures and would perhaps highlight one particular fund, the Ardea Real Outcome Fund (HOW0098 AU and XARO AU) as a potential stand out performer in the months to come.
Ardea’s fund is a dedicated fixed income relative value manager which means it seeks to profit from the dislocation in fixed income assets that invariably occurs in times of liquidity stresses.
Our long-term pessimism on the Australian Dollar is a bet that we are considering unwinding such has been the speed of the fall.
But on the whole, this is just adjustment and nothing major.
We continue to advocate for investors to resist the temptation to add risk to portfolios until we are closer to a peak in the virus infection rate.
We sincerely wish you all our best of thoughts in this trying time.
Once again we are extremely fortunate to be Australian citizens and we will certainly overcome this existential threat.
Friday 20 March 2020, 3pm
For more information on the above please contact Bentleys Wealth Advisors directly or on +61 2 9220 0700.
This information is general in nature and is provided by Bentleys Wealth Advisors. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.