Markets have shown signs of having seen a short-term bottom this week, with volatility reducing rapidly (from admittedly extraordinary high levels) and the ASX 200 almost 9% off its lows set last week. . .
Markets have shown signs of having seen a short-term bottom this week, with volatility reducing rapidly (from admittedly extraordinary high levels) and the ASX 200 almost 9% off its lows set last week. The catalyst is a bit unknown; central bank and fiscal stimulus measures have been historically unprecedented, but governments and central bankers had already been effectively saying ‘whatever it takes’ so in my view we have passed the point of peak negativity when all shares had been sold down irrespective of the short-term hit to revenues and what the future would look like beyond this crisis.
The simple fact is that, on the balance of probable outcomes to emerge from this outbreak, the market had been oversold and a rally was overdue. Now, where we go from here will depend on how effective the policy responses will be to keep small businesses and workers financially supported and how long this disruption will last, which ultimately means the biggest determinant will be the effectiveness of each country’s handling of the outbreak.
In Asia, we have seen plenty of countries get a handle on their outbreaks and some economies are functioning relatively well. In Europe, we are now seeing widespread lockdowns and early signs that this is slowing down the outbreak in Italy and Germany, and hopefully the UK, France and Spain will show improvement in the coming days. In Australia and the US, we are a few weeks behind as far as social distancing measures are concerned and it remains to be seen how each country will attempt to restart their economies. If South Korea is the model to be followed, a huge testing regime with technology assisting infection tracing is key and could mean that once the outbreak is contained we could see businesses reopen.
From an investment perspective, stress-testing one’s portfolio is vital to ensure little exposure to stocks vulnerable to collapse if the economy remains shut-down for an extended period. Companies with high debt levels and serious short-term cash flow issues, while having the most upside if things recover quickly, are not worthwhile on a risk/reward basis. There is enough upside across the market to be able to avoid the riskiest names and still enjoy a recovery in one’s portfolio if things improve quickly, while avoiding the unnecessary downside if the outbreak is protracted.
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