The Paradigm Group, alongside Investment Committee members and appointed specialists are continuing to assess the current global economic environment and current market volatility.
A week ago, global equity markets were robust on the back of ever lower interest rates, relatively stable economic growth and a belief that corporate profits – that basically stagnated through 2018 & 2019 – would improve in 2020. Valuations – particularly in Australia – were generally at the upper end following strong momentum. It is important to assess subsequent events from this starting point.
During last week, it was announced that the efforts to contain COVID-19 within China had failed as the virus spread across borders with cases rising in other regions of the globe. This created an immediate and swift change in the markets attitude towards economic growth, with fears accelerating that global economic activity would be materially curtailed as countries engaged new measures of containment. Concerns surrounded the economic supply chain and the efficient manufacture and delivery of goods across the world, particularly from China.
Global markets suffered material falls, losing all the gains that had been made this financial year to date. The swift nature of the correction in global equities has caught investors off guard. Past instances of 10% market corrections for the U.S. S&P 500 share market index show us that the current correction is the fastest in history, taking only six days. Consistent with previous experiences of heightened fear, even companies with businesses that are relatively immune to the coronavirus were sold off.
On Friday, Goldman Sachs, updated its view on China indicating a different message to the markets fear and panic. Some of the more positive factors included new confirmed coronavirus cases over the last few days remain at lower levels than a week ago, daily coal consumption of major electricity producers has increased slightly and passenger numbers on domestic flights had picked up.
There are two questions investors now have to grapple with. The first is whether the market reaction has been overdone given the figures surrounding the spread of the coronavirus outside of China remain low as a share of the population. The second is whether the market recovery will be as swift. While it is too soon to tell on either, what we do know is that uncertainty is the markets greatest fear and fear is the most powerful emotion.
Fear is not an unfamiliar emotion in financial markets and a factor that investors have generally encountered in prior bouts of ‘risk off’ periods. However, we support the long-term view that at some point, infection rates will peak and treatment and vaccine will assist in control. The statistics when compared to the common flu and other causes of death are low. Of course, it has short term economic impact with disruption particularly in the supply chain of global goods. As a result, caution remains high, however value is returning to global share prices with the recent negativity. Whist we are yet to see the damage to 2020 corporate profits fully revealed, we feel market valuations are currently approaching an attractive point and any further weakness (or clarity on the end-game for COVID-19) will create genuine value.
From a global perspective, there is a wall of money looking for a home given such low cash yields and when stability starts to prevail, there is no doubt that an opportunity to buy into weakness will exist. The current disharmony is likely to trigger further stimulus measures from China.
In the short term, it will also give further fuel to interest rate cuts domestically and in the US and potentially more pressure on the downside for the $A, which assists unhedged global exposure.
As you know we don’t like the concept of trying to pick the top or bottom of the market (market timing) however we have had success in buying into the dips historically. We are freeing up additional cash funds from fixed interest, on top of current cash holdings, ready to commit to global and domestic equities if we feel markets have reached a point of attractiveness despite some of the uncertainty that will still remain for some time to come.
We will keep you informed of further information as it comes to hand but if you have any queries, please do not hesitate to contact your Paradigm Group advisor.
Mike Hawkins, Paradigm Group – Investment Committee Chair