Sovereign Wealth Partners and InvestSense Pty Ltd
March saw the enormity of COVID-19 crisis hit markets in earnest. First, it was the spike of cases in Italy and the health implications for other countries around the world. Then the focus turned to the economic impact of the shutdowns that the Italian experience suggested might be necessary. Around the middle of the month, it morphed into a financial crisis as all-important credit markets started to seize up. Then in the last 10 days of the month, central banks and governments around the world literally threw everything they had at the crisis. Broadly these initiatives split into the provision of liquidity to ensure the functioning of financial markets and fiscal stimulus designed to provide a bridge through the economic crisis and help people deal with the loss of income.
For markets and portfolios, this meant that most markets were down around 30% from peak (21 February) to trough (16 – 23 March depending on the market). Most markets rebounded approximately 10% in the last week or so of the month.
Otherwise, the following market moves and relative returns were also very notable:
- Asian markets continued to be resilient and some only fell 15-20% as the focus of the crisis moved from Asia to Europe and much of Asia (notably China) returned to work. Europe was the worst hit market with the US and Australia falling in between.
- Currency was an important factor for Australian investors – the weakness of the export and trade-dependent Australian Dollar versus the “safe–haven” US dollar. This meant that for an Australian (unhedged) investor, the falls of US equities were actually less than 10%. Unhedged Asian and European equities were only around -5% and -15% respectively while Australian equities were down over 20% for the month. Thus, unhedged overseas equity exposure provided a significant cushion for Australian investors.
- Otherwise, there was really nowhere to hide as even relatively safe government bonds issued by Australia and the US were down by 4-6% at some point, ending flat as yields came down near the end of the month.
- REITs (listed property trusts) also lost their defensive lustre and overall many REIT markets, including the Australian sector, halved in value due to economic concerns (the ability of tenants to pay rent) amplified with varying levels of debt. These sectors did rebound by 10% or so late in the month but remained the worst performing asset class.
With the market down 30%, this crisis is comparable in recent memory to the 1987 crash, the Dot Com Crash and the Global Financial Crisis (GFC). Only the crash of 1987 saw an immediate rebound while the latter two were associated with an ongoing economic malaise with further downside. We now believe that a deep recession and global lockdown of around 8 weeks is priced into markets.
Taking valuation into account, most markets (excluding the US) are as cheap as they have been after any of these crises. On the other hand, US equities still trade at a premium to the rest of the world and if investors were to lose faith in US leadership of the global and corporate economy then we could see significant further downside. While we know much more about the virus and how it is affecting the global economy than we did at the start of the month there remains significant uncertainty. The situation in the US is of particular concern. For these reasons we feel that it is perhaps too early to unequivocally ‘go long’ the equity markets, but we do believe it is the time to start looking for well-priced assets to invest in.
On a ten year view, it is clear that the prospects for long-term investors in equity markets are better than it was two months ago, even if market moves in the short-tern remain highly uncertain. On this basis, our research efforts are focused on researching the relative opportunities that arise. You can expect some re-positioning in the coming months. That said, if developments arising from the virus take a further adverse turn and/or we see structural issues in credit markets, we are in a position to shore-up the defensive investments in portfolios.
Financial commentary contained within this report is provided by InvestSense Pty Ltd (InvestSense Pty Ltd (ABN 31 601 876 528), a corporate authorised representative (CAR 1006839) of Sentry Wealth Pty Ltd (ABN 17 151 866 385, AFSL 408800), who is the Portfolio Manager of this Portfolio.