Since markets started rolling over in late February, we have seen three distinct stages in the market.
The first one was the indiscriminate selling for almost a month which saw basically all asset classes sold down rapidly. The second stage came as clarity emerged about the success of mitigation efforts globally and as clear ‘winners’ emerged – companies which either saw little to no impact on revenues or even those who were actually seeing a benefit. Finally (and the stage we currently find ourselves in), as hopes of a potential V-shaped recovery grow we are seeing strong outperformance from those stocks most leveraged to a return to normality such as the banking sector.
The first stage saw the ASX 200 fall roughly 39% from its peak in February in just over a month, and the next two stages have combined to see the ASX 200 bounce 38% from its lows which still marks a fall from the February highs of approximately 15%.
The big question at this stage is where we go from now? Does infection and economic data continue to surprise on the upside, leading to a continuation of stage 3? Or do we reach a new normal where restrictions remain tight, thus limiting the upside for the economy but also averting an extended recession and where the directions of stocks will be dictated by their individual experiences? Or, will we see a second wave of infections leading to reinstated social and business restrictions and leading to more health and economic chaos?
All any investor can do at any point is to take a view and position one’s self for that eventuality. Few people would have been able to pick the trajectory of this crisis from both a health and economic angle, and both the falls from the top as well as recovery from the bottom have mystified experienced investors around the globe. Once the worst-case health crisis looked like it had been averted, the goal at Rivkin was to ensure exposure to the names that benefited in stage 2; names that would recover in a market bounce but that would also recover because they had been fortunate enough to avoid a significant impact. Technology names and consumer staples stand out as examples of this.
The question now is are we at a new stage that will be sustained? Only recently, our big concern was what would happen if we saw a second wave of infections. That question has potentially been made irrelevant since then as a huge shift has been seen in the political will of governments around the world. Mitigation efforts were implemented to allow governments to ramp up hospital capacity, and to then have increased testing and tracing capabilities to handle any spot fires that may emerge. That strategy has worked in Australia brilliantly and it’s safe to say there is a good chance that any outbreaks will be handled quickly and have little impact other than to slow the return to normal.
The U.S. has been a concern with the botched handling of the pandemic, but like Australia the political will has changed, and I am not sure that this will be reversed. With infection and death numbers dwarfing other developed countries and with a federal election in November, a recovery in the economy is the best bet Donald Trump has if he is to be re-elected and that will be the only focus of the federal government until then. Twenty U.S. states are still seeing accelerating Covid case numbers while re-opening, and it seems a new normal – consisting of continued caution from at-risk individuals, mask-wearing from a large number and social distancing – will be the status quo until/if we see a vaccine. While I remain heavily doubtful that this will lead to a V-shaped recovery, I think the economic picture will be a lot better than feared in this scenario and with monetary policy still supportive of equity markets and likely to remain the case for the foreseeable future, equities could continue to rally despite the grim economic picture.
