Market Update - 17 March 2020

We understand many of you would have seen the incredible share market volatility during the last few weeks, which has seen trading days of up or down 10%. Overall share markets have experienced falls which appear to be a function of panic regarding the inability to model the impacts of Coronavirus containment on the economy and asset prices. Once panic sets in, rationality is hard to come by. 

What is likely is that the global economy will fall into recession in the 1st half of this year given the economic impacts of containment. What is certain in our view is that the economic impact will be short-lived, with the virus having already passed its peak in China, and at this stage likely to pass its peak ex-China over the next 4-8 weeks.

How are we thinking about markets? Whilst panic has set in, we would urge you all not to panic. Selling assets following short sharp falls like those we’ve just experienced simply crystallises those losses. Equity valuations are now back to fair value or below in some regions.

Our clients hold well diversified portfolios containing quality holdings. We are in a position to ride out the volatility, remembering we have enjoyed strong returns over the last 11 years. We have received a number of enquiries about investing surplus cash now. Depending on your risk appetite, putting excess cash to work following a sharp drop in markets has historically proven to be fruitful. Yes, you might catch a bit more of the bottom, but it’s impossible to get it perfectly right. 

Try not to get caught up in the hysteria. Ignore fake news and press fearmongering – in times like these, you get a good feel for those truly credible news sources. The best example of the fear in the general population appears to be the desperate need for people to buy and hoard large supplies of toilet paper! And most of all, stay safe, focus on your health and the health of those close to you.

We have included below a recent update from Dalton Nicol Reid (DNR), an Australian equity manager that we incorporate into some client portfolios to provide a view from an Australian perspective:

Market Update (DNR)

The market has reacted sharply over the past week as news of COVID-19 continues to dominate. The policy response has been to encourage social distancing to slow the pace of contagion. This clearly has a very negative impact on a range of industries (tourism, restaurants etc.) especially small business and on the economy. Concerns centre on the ability of certain industries (especially small business) to survive the revenue fall likely in the next few months.

To offset this impact, Governments and Central Banks are undertaking co-ordinated policies. These are a moveable feast at present. Governments appear prepared to do what it takes to support the economy through this period. The focus appears to be ensuring liquidity is available and we highlight the following policies:

1. Globally interest rates have been cut aggressively.
2. Support to ensure the cost of borrowing for banks remains low. This helps ensure they can provide financial support to their customers. We have spoken to the banks and note the ability to support customers via providing more credit, deferring interest costs or enabling repayment holidays.
3. The Federal Government is providing tax relief to small business and handouts to low income households which should be transferred via spending to small businesses.
4. Fiscal stimulus programs globally continue to evolve and we understand a large program in China is expected.

While the impact on short-term company earnings has the potential to be material, the overall value of a company is not significantly impacted by the outlook for earnings over the next six months, but rather its future long-term earnings capacity. When the market is caught in the moment of uncertainty, the focus of market participants can shrink rapidly and we think it is a mistake to become too short-term in your thinking at this point. Old investor sayings of ‘buying when there is blood on the streets’ or ‘buying when others are fearful’ usually hold true. While clearly, news regarding COVID-19 has the potential to drive uncertainty and volatility, we are focused on the following:

• Thinking through where there will be long-term changes to behaviour which might impact the value of a company e.g. Domino’s Pizza Enterprises (DMP) is benefiting from an increase in downloads of their apps in Europe and increased usage. Once the app is downloaded it can drive ongoing usage over time.
• Identify quality companies which have been sold off in the current environment yet the long-term health of the business looks strong e.g. Ramsay Health Care (RHC) owns a strong portfolio of hospitals and is down 30% from its highs. In the short-term there will be a decline in elective surgeries (partially offset by a pick-up in patients transferred from public hospitals) but in the long run little has changed—they own high performing hospitals which will benefit from an ageing population.
• Using the volatility to improve the quality characteristics of the portfolio—good companies are usually the first to be bought into a recovery.

Looking forward, interest rates will be low. Globally, stimulus will be strong and the peak fears surrounding COVID-19 may well be behind us. Equity markets have survived world wars, terrorist attacks and a GFC – a global pandemic, while no doubt a serious issue, will also pass in time.

The market sell-off has been very sharp and indiscriminate and we see this as providing a range of opportunities to buy good businesses at very attractive long term valuations.