There is no sugar coating how quickly things have deteriorated over the last few weeks. What had started as a health crisis has escalated rapidly into a financial crisis, and anyone who claims to know what comes next is not to be taken seriously. Most foreign governments have ignored the warnings of countries before them, and now it seems the only measures to be made that can slow the spread of the virus is to shut the economy down. It didn't need to be this way - Singapore, Hong Kong, and South Korea have stabilised their infection rates very quickly with incredible progress on testing, public area disinfection and social measures - but in some of the world's largest countries we are only now seeing acceptance of the magnitude of the threat.
In Australia, only two weeks ago, I would’ve considered us very lucky with the healthcare system we have and the early steps taken by the government. But that progress has slowed, and I cannot believe gatherings of up to 100 people are still allowed. I cannot believe the NRL played games with crowds this past weekend. I cannot believe the trains funneling workers into Sydney’s CBD are filled with people. The number of anecdotal stories of bars and clubs packed only this last weekend is shocking to me and suggests that a significant enough amount of Australians do not realise how big an effect this outbreak could have on their livelihoods. Perhaps past experience with SARS is why Asian countries have responded so well, and this will probably be the Western world’s SARS moment, and we will be more prepared the next time.
For now, what should we expect to see next? I think we are likely to follow the steps taken by many countries in Europe. Restaurants, bars, gyms etc. will be forced to close, while essential retailers like supermarkets, bakeries and restaurants providing takeaway or delivery will remain open. The Federal government is in the enviable position of having run a budget surplus and now is the time for the government to throw money at those businesses and employees that will be affected by this. How effective this fiscal response is and how quickly the virus is contained will determine the severity of the recession we encounter and how long it will take to recover.
From an investment perspective, what measures can we take? The market is now down over 30% from its recent highs, so there’s no doubt a significant recession has been priced into stocks already. Some companies are particularly vulnerable to collapse the longer the crisis continues – airlines, travel agents, casinos – and some will still be able to perform relatively well. We have kept a vigilant watch on the names within our portfolios and ensured we keep names out of the portfolio that we think could be vulnerable to collapse. There are a few names worth discussing that we will cover separately.
As far as portfolio construction, we are starting to see stocks finally fall out of the Momentum strategy, so we are likely to have a high weighting to cash very soon. That is a decision we are comfortable with as peak pessimism is not likely to be seen for at least a month in our view. In our opinion, stocks will start to recover once infection rates begin to slow, which will be a sign that businesses will be able to reopen in the near future. As long-term investors, we don’t encourage trying to pick the top or bottom and stick to a plan, but depending on your personal position you may wish to hold onto a higher cash weighting than usual.
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