Market Update - 13 March 2020

Blog
Thursday 12th March 2020

Market Update - 13 March 2020

Blog
Thursday 12th March 2020
Written by Chris Lioutas

No doubt many of you would’ve seen the large falls in equity markets over the last couple of days. Today will be no different, given the large falls we saw overnight in global equity markets.

The falls are 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 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.

In the last few days, we have seen all asset prices fall – equities, bonds, property, infrastructure, gold, and other commodities. The one we’re most concerned about is bonds, as bonds should act as a buffer when equity and other growth assets are falling, which they have largely done since late January until a few days ago. However, concerns have now arisen regarding liquidity in bond markets, which is why government bond yields have been rising (i.e. prices falling). Those concerns need to be allayed and can only be allayed via central bank action.

The ineptitude of central banks and governments is now on display, which has exacerbated the panic.

The central bank ineptitude is disappointing given we expect more of them. They know what is required and right now have been too slow to respond. However, that could change rather swiftly. Rate cuts won’t help when it comes to a demand and supply shock via virus containment. What is imperative is that they provide bond markets with comfort regarding liquidity. That means very simply standing at a lectern and announcing open lines of credit to those in need, whilst also announcing a ramp up in their monthly bond buying activities (i.e. money printing) to provide support to the bond market. Only once the bond market functions with order (i.e. rises when equity markets fall) can other assets like equities begin to heal.

The government ineptitude is disappointing, but hardly surprising. Many times, history shown us that voting in “Populist” leaders is a bad idea, and again we continue to make the same mistakes. Populist leaders generally rise to power when the populous is annoyed at the status quo. Generally, the status quo is the better of the two evils. The problem with populist leaders is that they usually have no political background, they have little regard for others (i.e. ego and narcissism), they surround themselves with people who simply agree with them rather than controlling them, they don’t take counsel, and their true colours (or ineptitude) shine when stress or panic sets in. We now have populist leaders in the US, Britain, Russia, Brazil, India, Hungary, Turkey, and Australia, so no one should be surprised by their responses to the current malaise. The policy responses from the US and Australia in the last few days are comical. What is needed are policies that promote business and consumer confidence. That means very simply standing at a lectern and announcing things like income tax cuts, corporate tax cuts, payroll tax holidays for businesses, encouraging banks and other lenders to ignore breached lending covenants and provide support to those businesses in need to ensure that employees are retained. They need to put a floor under economic growth and ensure unemployment doesn’t rise from here.

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.

Whilst there may be further momentum down in markets, now is the time to consider:

1. Portfolio re-balancing – assuming a well-diversified portfolio is in place, re-balancing now would result in defensive assets like cash and bonds being trimmed to purchase growth assets – i.e. trimming the most expensive part of your portfolio to top-up the cheapest. Has worked over decades and centuries.

2. Excess cash – 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.

3. Ignoring fake news and press fear mongering – in times like these, you get a good feel for those truly credible news sources. There aren’t many left to be honest.

Overall

  • Central bank policy globally remains supportive of investment markets. 
  • Global economic growth will be hit in the short term, with recession likely globally in the 1st half of this year, before improvement in the 2nd half. improvement should be rather swift given expected policy response. 
  • Equity valuations look attractive, buy when others are fearful, or at the very least, stay the course. 
  • Bonds remain expensive, but have worked as expected in providing a ballast in portfolios. Liquidity crunch remains a concern, which we expect to be corrected via central bank action. 
  • Property and infrastructure valuations now look more appealing, with prices having held up reasonably well in the current sell-off. 
  • Political risk remains a concern - populist leaders aren't politicians, i.e. they have no experience when it comes to stress events and risk. Hoping their missteps aren't too significant to fix over the medium term. 

The key right now is to remain calm as difficult as that might be. Any excess cash should be drip-fed into growth assets. Portfolio re-balancing is a must in these types of extreme environments. Refrain from crystallising short term loses near or at the bottom follow a sell-off. 


Author, Chris Lioutas, Director 

Insight Investment Consultants


Chris is an independent consultant and is a member of Maxim Private Clients Pty Ltd Investment Committee.

With permission of the author, this article is presented by Maxim Private Clients Pty Ltd AFSL No. 511972


Maxim Private Clients Pty Ltd ABN 47 611 614 398 AFSL No. 511972

Disclaimer: This material has been prepared without considering any potential investor's or clients objectives, financial situation or needs. This article is of a general nature and does not consider the individual circumstances of its recipients. Any information contained within this publication should not be misinterpreted as advice in any way. Please consult your financial advisor should you have any questions or concerns