Sovereign Wealth Partners and InvestSense Pty Ltd
The local share market was up around 10% in April, in line with global markets but this seemingly impressive result has to be seen in the context of the much bigger fall seen from late February and the turnaround that started around the 23rd of March. From that perspective, global markets fell by around 30% and have since rebounded by over 20% (and by almost 30% in the case of the US). Such large numbers in a short space of time can lead to confusion when reporting in percentage terms – if a hundred dollar investment falls by 50% and then rebounds by 50% you are still $25 in the red. In this case that $100 has settled between $85 (US equities) and $75-80 elsewhere. Markets recovered in the last week of March and the first week of April and have been fairly range-bound since.
While many commentators and investors have been surprised by the speed and scope of the rebound there is an emerging consensus the stimulus announced by Governments and Central Banks (the US Government and Federal Reserve in particular) in late March effectively backstopped markets and that the losses we are left with are the markets best estimate of the economic cost of the COVID-19 virus if we attempt to look through to the other side of the crisis. This is very much in line with the narrative put forward by Warren Buffet on the first weekend of May when outlining his view of the intrinsic value of Berkshire Hathaway. Berkshire Hathaway came into the crisis with a large cash pile and a contrarian instinct but felt that the Fed quickly removed a fleeting buying opportunity. Given where things have settled, he doesn’t see too many outsized bargains, in direct contrast to the last financial crisis where he stepped in as a buyer of last resort, at scale. The ‘blood on the street’ has been quickly mopped up it appears. By the same token Berkshire has not felt inclined to buy back much of its own stock either and has been a net seller of equities (the shares in airlines that he had previously bought). Buffet also sees Berkshire Hathaway’s value as having been impaired to the extent of the approximate cost of the virus to his underlying companies in terms of future cash flows, or about 15% since 21st February.
The performance of other asset classes during April followed a similar script – a continued, partial reversal of what we saw in early March both here and abroad. Small caps bounced by more than large caps, as did Property trusts. Credit outperformed Government bonds. IT, Energy and Materials led the market upwards while defensive Healthcare, Telecom, Utilities and Staples lagged. Slight anomalies included the fact that value stocks continued to lag growth stocks (with tech stocks seen to be relatively immune to economic COVID-19 symptoms) and local government bond yields drifted slightly higher while US Treasuries yields headed lower (given the huge bond-buying spree by the US Federal Reserve and the apparent success of Australia in subduing COVID-19).
On a ten year view, it is clear that the prospects for long-term investors in equity markets are better than it was 3 months ago, even if market moves in the short-term remain highly uncertain. On this basis, our research efforts are focused on researching the opportunities that may have arisen. That said if the development of this virus takes an adverse turn and/or we see structural issues in the broader economy we are still in a position to shore-up the defensive investments in portfolios.