From Jonathan Bayes, consultant Chief Investment Officer, Bentleys Wealth Advisors
Coronavirus Investment Playbook Edition
In light of these extraordinary times in which we are living, we thought it best this week to dedicate the weekly market update exclusively to our thinking insofar as the spread of the virus and its impact on global financial markets.
Events are changing daily, so please treat this in the context of a volatile landscape and as our best guess at this moment in time.
- We expect investment market volatility, both up and down, to persist for 6-8 weeks through until around mid-late May using the Chinese and Korean infection rates as a rough guide
- This assumption could prove optimistic on the grounds that the US only began mass testing 10 days ago
- Europe is now in shutdown with Spain, France and Italy all largely under quarantine and retail and services limited to supermarkets, pharmacies, petrol stations and medical
- New York was effectively placed on similar lockdown terms Monday morning with bars and restaurants limited to takeaway and all cinemas, nightclubs etc closed
- It would seem fair to expect that London might find itself in a similar situation in the days ahead
- Australian schools are seeing term dates brought forward, with some immediate term endings announced as of today
The negative
This sudden cessation of ‘business as usual’ will be a shock to the system for all in the western world but will have a devastating impact on businesses in the hospitality, travel, accommodation and recreation services industries.
Cashflows will stop still for potentially 2-3 months.
Liquidity conditions globally tightened at the fastest rate since the GFC as concerns escalated as the credit worthiness of those seeking liquidity.
We should expect unemployment to escalate rapidly as staff are laid off and businesses seek to conserve cash, which is precisely why emergency policy both in the U.S and Australia is focused is being targeted at payroll taxes and subsidies for employment of apprentices etc.
Bad debts will emerge both within corporates and businesses in the coming 6 months which will tarnish bank earnings alongside the crunch to net interest margins from the rush to zero interest rates.
Corporate earnings will see major loss of momentum and with respite unlikely before the 2H, investors will remain cautious in their outlook.
Lastly, the suggestion that the US administration has been slow to react to the evolving crisis has seen President Trump’s public support plummet such that there is now an even-money chance of a change in the White House come November, and with that the threat to the economy of new death tax rulings, a $15/hour minimum wage and a rolling back of the Trump corporate tax cuts.
The positive
This situation is highly nuanced.
In spite of the many economic negatives the coronavirus is likely to inflict on business, the economy and personal balance sheets, its important to understand that markets have already fallen a significant -30% in Australia, that central banks and governments have unleashed the stimulatory spigot in recent days and that this virus is highly likely to be a short-term phenomenon.
The ASX200 is back at 2013 levels.
Australian major bank share prices are now back trading under book value for the first time since 1993 according to UBS analysis.
Many good quality companies have halved or more in the past fortnight despite having robust cashflows, balance sheets and secular growth.
Lastly, Australia is in the fortunate position of being not only isolated by geography, but also that our government finances are in a position to be able to stimulate our economy via tax cuts or ongoing infrastructure investment.
The fall in the Australian Dollar offers ballast to the likely economic contraction near term also, however we are increasingly of the view that the AUD <62 will prove near enough to a long term low.
The outcome
Our defensive portfolio posturing allows us to be in a position to be adding to risk over the next 6-8 weeks by allocating more to growth assets and by utilising cash in portfolios.
The aim will be to upgrade the quality of our various portfolios where possible, to seek out cash-flow and balance sheet strength and earnings growth.
Looking ahead
| Monday | US Empire Manufacturing (Mar) |
| Tuesday | AU RBA Meeting minutes, US Retail Sales (Feb), US Job Openings (Jan), US NAHB Housing Market Confidence (Mar) |
| Wednesday | AU Westpac Leading Index (Feb), US Building Permits (Feb), US Housing Starts (Feb) |
| Thursday | AU Employment (Feb) , US Philadelphia Fed Business Outlook (Mar) |
| Friday | n/a |
From an economic standpoint perhaps the most telling data release each week over the coming 2 months will be US weekly jobless claims which are reported every Thursday night.
Friday 5pm values
| Index | Change | % | |
| All Ordinaries | 5590 | -697 | -11.1% |
| S&P / ASX 200 | 5539 | -677 | -10.9% |
| Property Trust Index | 1363 | -216 | -16.4% |
| Utilities Index | 7022 | -861 | -10.9% |
| Financials Index | 4720 | -677 | -12.5% |
| Materials Index | 10498 | -1696 | -13.9% |
Friday closing values
| Index | Change | % | |
| U.S. S&P 500 | 2711 | –261 | -8.8% |
| London’s FTSE | 5366 | -1096 | -16.9% |
| Japan’s Nikkei | 17431 | -3318 | -16% |
| Hang Seng | 24032 | -2114 | -8% |
| China’s Shanghai | 2887 | -147 | -4.8% |
–
Monday 16 March 2020, 4pm
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.
