Market Update 25th March 2020
As the volatility in financial markets continues at extreme levels, and we do not have a clear positive path forward, we will continue to provide updates.
The roller coaster continued overnight with a substantial rise in overseas shares. Despite this, our markets ended the day up only approximately 5% or less than half of overseas markets which is disappointing.
The rise overseas was due to the expectation of being very close to the USA, finally announcing the Government stimulus. It’s staggering to believe that the political parties of the world’s largest economy have taken so long to put aside differences to focus on delivering a solution. However, we have seen this before from them during the GFC and other periods.
It will be implemented, and when it does, it will be positive. However, it is clear that the Government stimulus that we see around the world is critically necessary for three main reasons;
1. As interest rates are so low, Central Banks have less ammunition in terms of the traditional tools they could use. So Governments must act.
2. The financial markets and economies need support to keep operating in some degree of a normal manner.
3. Much of the population needs support, either right now or in the period ahead or both.
We need more than a one-day sugar hit. We need to see sustained, back to back positive days to be confident of a recovery. To do this, the number of new infections needs to reduce.
The Governor of New York recently spoke very grimly about the increasing rate of infection and the limits on what else they can do. He said they are doing all they can.
The WHO has confirmed that for the first one-hundred thousand people to be infected globally, it took 67 days. The second one-hundred thousand took 11 days, and the 3rd one-hundred thousand took only four days. That was to the 23rd March, and we now have over 400,000 people infected today.
There are reports about large numbers of infections in India and Indonesia. However, the official figures only show 562 and 686 respectively, which is hard to believe. It is worrying to think about these large populations, in condensed areas, and the ability of their medical systems to cope.
The longer the Pandemic continues, the more significant the economic damage will be. Our Portfolio Manager for the DMG Diversified Portfolio and Economist, Dr. Bart Dowling wrote;
Now that we have a timeline of what to expect in terms of ‘another 4wks of media madness’ before the news from the Northern Hemisphere gets progressively better, what are we doing about it? In short, we are remaining defensive rather than looking for a floor to deploy growth assets / take some of our hedges off. The big unknown at present is how the corporate credit market will hold up in response to these stresses.
Over the past 2 weeks, we have witnessed investors liquidating better quality fixed income positions and even gold simply because they are liquid assets and wanted to raise cash. This resulted in the perverse outcome of better quality assets underperforming at a time of crisis and is one reason why the US Federal Reserve and even our own RBA have been forced to cut cash rates drastically and embark upon bond buyback programs over recent days.
Only time will tell whether this action on behalf of central banks has been successful in keeping bond markets fully functioning – and thereby preventing the present crash morphing from a (dare I say it) ‘garden variety’ style of recession/market crash in a much more sinister full financial market meltdown more akin to the GFC. If this were the case, equity markets would have at least another 20% to fall and some of the perverse pricing presently being witnessed in quality assets would soon reverse as the ‘flight to quality’ would become a mad panic. It is, for this reason, we are staying defensive rather than looking for a floor (and are tolerating some of the recent poor performance of our defensive holdings that are holding quality assets).
The good news is that once we get through the next 4 weeks (and assuming there has been no major financial institution collapses inspired by frozen credit markets - although we do expect a number of corporate bankruptcies) then (given the way the virus is spreading) it appears we will have turned the corner. It is then that we should be looking for equity markets forming some sort of floor and can potentially emerge from our defensive bunker in grasping some of the opportunities that the present crisis has presented. In reality, we recognise we may be late in picking the exact timing of this floor formation but the real danger of a tail risk event of 20% additional downside if credit markets fail precludes us from being too brazen at this stage.
What is important to remember, however, is that at the moment there is definitely good news out there – it’s just not being reported. Further, this crisis (like all the crises that have preceded it) will end at some point and given the way the virus is presently progressing after ‘another 4 weeks of madness’ we believe this endpoint will not be too far away.
The mathematical modelling indicates that sometime over the next 4 - 6 weeks we will see infections peak and then begin to decline. In the meantime, we will be in the worst period.
What are the Investment Committees doing?
Both committees are meeting with our managers regularly and communicating most days internally. The full committees meet more often now. As an example, the full committee of the DMG Diversified Portfolio met yesterday and today.
In addition to this and more specifically in relation to each portfolio;
DMG Diversified Portfolio
Firstly, we remain satisfied with the level of protection that we have delivered. Losses have been significantly limited.
Secondly, we have also made changes. We have decided to exit two positions that gave us concerns about their ability to navigate further falls and also their ability to recover strongly. We are placing this money in secure cash and will gradually invest in a share market fund that we expect to capture all of the market upside when it occurs. We want to be in the best position we can entering the recovery.
Clearwater Dynamic Portfolio
We have continued buying, but at a slower pace over the last week as we expect markets to fall further. We ceased buying into the India fund a few weeks ago. We also sold one fund for the same reasons as above for the DMGDP. We are building up cash and are well-positioned to make further investments. We expect these to be at even cheaper values and will contribute to strong performance results in the future.
As this document was being completed, a final check on the markets indicated that the USA has agreed on the package. This helped lift our markets in the final minutes of trading.
We will continue to provide further updates. As always, contact your Financial Advisor if you wish to discuss this in more detail.