In the last few days and overnight in overseas markets, share markets continued to fall. Last night, investors were anxious about President Trump’s new travel restrictions between the US and Europe. Volatility remains high, and there was some midday relief as the US Federal Reserve (the Fed) announced plans to inject vast amounts of money into the financial system, totalling at least $1.5 trillion. The relief was short lived however, as uncertainty and fear remained the overwhelming market emotion.
It is also important to remember that the solution to such an environment never fails – ‘the passage of time’.
With the passage of time (and in this instance it could still be a matter of weeks) clarity inevitably improves, the marginal investor can quantify impacts and identify the winners & losers. Clarity does not have to immediately bring good news; it just needs to bring a bit of certainty and markets will stabilise/recover.
So, where are we at…
A few positives –
- China is steadily ramping up post its February shutdown – supply chain disruption will ease.
- After ~3 months, China has apparently contained the spread of the virus to a remarkably small section of the population (using aggressive tactics…).
- Policy response: rate cuts and broadening fiscal initiatives will deliver.
- Lower oil price – a huge win for the real economy.
- Equity valuations are back to a point which encourages two-way flows and panic selling should not dominate.
- Business conditions in Australia in January and February were remarkedly resilient.
But a few negatives –
- COVID-19 continues to spread (ex-China) and with it, enduring uncertainty in relation to the macroeconomic & earnings implications.
- Lower oil price – a hit to the energy sector.
- Central banks are effectively powerless when it comes to interest rate policy having used much of their ammunition (outside providing liquidity support for credit markets if required).
Clearly the negatives are understandably still in command, but the list of positives has steadily grown over the past 2 weeks.
Our view is that valuations are now attractive, and we feel it is now time to lift aggregate equity exposure with a view to moving overweight into any further weakness.
One final observation. In the prevailing environment we would not be surprised if Australia – and the A$ – came to be viewed as a global safe haven. In the GFC, Australia gained great leverage from Chinese stimulus measures (which are likely to ramp-up); our housing sector is strengthening; our banking sector is robust from a balance sheet perspective and we are an island! Global inflows are likely to pick-up from here.
The graph below, updated to yesterday, uses quite a complex factor “Implied Equity Risk Premium” to deliver a simple message. The “Fear” factor looms large (close to levels last visited in 2011 at the peak of the European debt crisis when major European Governments and Financial institutions were under massive financial stress), and history has shown that the best buying opportunities exist in times of the greatest fear.
Please feel free to contact your Paradigm advisor should you wish to discuss any issues in relation to your specific circumstances.
Mike Hawkins, Paradigm Group – Investment Committee Chair