Investment Market Update #2

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Just 2 weeks ago we released a special report on the trailing impact of the Coronavirus (which you can read here).

At that point, markets had dropped around 10% in most parts of the world. The most significant daily drop had been around 3%.

Since then, markets have dropped up to 20% (at their worst) with the worst day around a 7% decline, almost doubling the severity of the scenario.

It’s fair to say that there is panic in the markets. But is all of this logical? Expert money managers that we work with don’t believe so.

If you’re wondering what the difference between money manager/fund manager is and a financial adviser, here it is:

In the world of finance there is so much to focus on all of the time that it pays to work with people that specialise in their respective fields. We work with fund managers that focus on topics like – Global Investing, Small Cap Investing, Infrastructure, Fixed Income & Bonds and so on. It’s a full time job, for each respective role! And our clients get the benefit of us selecting the best managers to work with.

Here’s what’s playing out at the moment:

On Monday the 9th of March, oil prices were down more than 25% and government 10 year bond yields down more than 40%. These are some of the biggest daily moves we’ve ever seen.

Investors were shocked by firstly the failure of parties to reach a deal on oil production cuts to help lift the oil price, but were then freaked by the Saudis move to instead increase production significantly and then also significantly discount prices on contracts already in the market, effectively declaring a non-combat war on the Russians.

The Saudis are in a position to produce oil at any price in the short to medium term, but at current prices will make it almost impossible to finance their budget. The move would financially cripple the Russians and the US shale oil/gas industry almost immediately. A deal is there to be reached it’s just a matter of agreements being made.

Market sentiment wasn’t helped by increased Coronavirus fears, with the Italians locking down the north of Italy with almost a quarter of their population now in quarantine, following a spike in the number of cases and number of deaths. A rather extreme move, but a function of their almost zero action to date and the complacency of their citizens. We advise Aussies to follow best practice when it comes to your hygiene and keep your distance from people who show symptoms or may have been in contact with sick people.

Right now for the world of finance, the main concern remains with the oil price shock and the potential impact on sub-investment grade debt.

This weeks moves will be met by strong fiscal stimulus by governments globally to combat the short-term impacts of Coronavirus, and increased support / confidence from central banks not via rate cuts but rather via increases to lines of liquidity.

We are likely to see further rate cuts from central banks from here, with the Fed possibly skirting another emergency rate cut of 0.5%.

The Australian government has announced a $2.4 Billion stimulus with state governments acting to provide support too.

What should investors do?

At this stage, nothing.

Selling into this panic is the worst mistake you can make, especially so when you consider that the oil price war is likely to be temporary as are the impacts of Coronavirus. December and January market and economic data, prior to Coronavirus, showed global economic growth was stable and asset prices didn’t appear to be too far above fair value.

Putting cash to work in your investments is an incredibly difficult call to make once broader market panic has set in, even for those with a long term perspective. At this stage, I’d be sitting still until we see some of the panic start to subside, whilst recognising that the fund managers in our portfolios will already be taking advantage of buying opportunities as they see fit. Once we see a normalisation of conditions though, there will be plenty of value to be had for long term investors.

As we mentioned in our previous article, industries that have been the hardest hit have been the travel and airline industry, technology companies that rely on Chinese manufacturing, also tech companies that are ‘highly leveraged’ or are seen as ‘expensive’ have been sold off to lower risks in portfolios.

While you should always proceed with caution, some have called this the opportunity of a decade for some stocks, especially considering how well they have been doing – outperforming expectations.

We already know that some of our managers are being opportunistic about the timing and have identified some companies at exceptional value that have seemingly been sold off for no logical reason, which presents them at exceptional value for our clients to enjoy in the long term gains.

In summary, it is an interesting time and an interesting combination of events that have unravelled this past week. As the great Warren Buffet’s investment principles go:

  1. Buy low and sell high – which means be greedy when others are fearful
  2. Never lose money – which means never sell at a loss if you can avoid it

Other investment principles which will serve you well during this time include:

Invest for the long term and invest in quality.

When reviewing your finances, we encourage you to look back to see where you have been, where the markets have been, and understand that the world is always growing, which means that an upwards trend is always just around the corner – remain optimistic and have faith, especially when you have professionals worrying about your money for you.

If you have any further questions, please feel free to make contact with our offices on (08) 6144 4000.

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