Column
Trading
Australia

General Market Update

26 Mar 2020
By
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.

Rivkin does not ever provide financial advice. Please consider your own circumstances before purchasing any of our products or acting on our general advice, for any Rivkin product or recommendation.

SHOW COMMENTS / QUESTIONS (4)

4
Comments

You need to be a Strategies user to comment on this post. Click here and become premium now!

Steve A.

The Director General of WHO highlighted 6 steps that countries need to take before they can lift a lock down without seeing a resurgence of cases. Read from the 10th paragraph, it starts with “We understand”. We seem to be doing some of the 6 steps.. https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19—25-march-2020

Shannon Rivkin

Hi Steve,

Absolutely we are doing some of the steps, and I think if we implemented all of them I would be very confident about returning to normal quicker than expected. There is definitely reason for some optimism despite the difficult time we all find ourselves in.

Regards,
Shannon

Alex O.

Hi Shannon, given the unprecedented level of quantitive easing around the globe, I would like to get your perspective on the threat of hyperinflation. Cheers Alex

Shannon Rivkin

Hi Alex,
I think right now the bigger concern is potential deflation, given flagging demand because of depressed economic activity as well as the impact of a plummeting oil price after Saudi Arabia and Russia start an oil price war.

Once this crisis is behind us, rising inflation is a risk but its likely QE will unwind faster than after the GFC given the likely quick recovery of the economy.

Regards,
Shannon

We are glad you liked it

For your convenience, this will appear under your Saved articles in the top menu.