Welcome to our Autumn edition of On the Marc. In this edition, we will review the markets for the 2020 calendar year to date and consider the outlook into the foreseeable future.
Market update
How the world changed in the first quarter of 2020! The global Corona Virus pandemic and resulted in March to be the worst month for the Australian share market since the 1987 crash and rounded out the worst first quarter ever.
The Australian market suffered its fastest bear market fall on record, plunging 37% between February 20th and March 23rd. For March, the market fell 21.2%, with energy (-38%), REITs (-35%) and Banks (-29%) the hardest hit. The oil price dropped 54% in March, due to the shock news of Russia not agreeing to production cuts and Saudi Arabia then electing to increase production. The results of these decisions triggered the largest monthly fall in oil prices and oil stocks on record.
The following chart shows the top to bottom drop in the Australian share market in comparison to the other 20% falls in the past. The golden line on the very left is the recent fall which illustrates just how far the market fell in a very short period in time.
It’s important to realise there is a great deal of controlled action coming from governments and central banks at the moment. However, though markets and sentiment feel distinctly out of control. It is important to remember the COVID-19 human crisis is an event which we can manage our way out. Should you wish to read more about the stimulus measures available please click here.
Panic and investor pessimism reached a fever pitch in March even above that of GFC levels. The bad news about the COVID-19 escalation is in abundance, and this human health crisis has fast evolved in a crisis for financial markets.
This crisis is, undoubtedly, significant and severe. However, it will end, and it’s vitally important for investors to brace for recovery, remembering that panicking and heading for the exit will likely lock in a loss while markets are racing to the bottom. At the time of writing the US S&P500 index is up 28% from the 23rd March low and the Australian share market is up 22.2%. Remember, the way percentages work it takes a much more significant percent gain following a fall to get back to where you started. For example, if the number 10 is reduced by 50% this equal 5 and this if we increase by 50% we are only at 7.5.
Below is a list of important events and happenings for investment markets, to remind you that there is a way out of this – and authorities are actioning the most substantial plans of our time to make it so.
1. The news has been incredibly bad, but the policy offset has also been monumental.
Daunting as restrictions and huge government debts are, it was more worrying when markets were in a panic, and policymakers were not panicking.
The policy support now is by far more than what we saw during the GFC. During the GFC, central banks were trialling various tools. Still, this time they know exactly what they have in their toolbox, and are using it effectively.
The following chart shows the combined global stimulus to date in red relative to the past 12 years and the blue shows future stimulus expected.
2. For the first time since February, markets have been able to put on back-to-back gains.
That’s a change in market character, and it means something. As market rally, the virus backdrop is also changing – for example; testing is becoming more available, daily rates of new infections are decreasing in places like Australia and Italy. This is a reminder to everyone that markets adapt, and they don’t stay in either a bear or bull run forever.
3. Productivity will be essential in the rebound, and the potential could be massive.
Governments are the iron lung of the economy at the moment. To facilitate that important role, they’ve gone into massive amounts of debt. It follows that productivity will be essential in the recovery, to force economic growth and repay what we owe.
For a long time, we’ve been talking about a low-growth environment, and central banks have been calling for productivity gains and investment. Now, growth will need to happen, and it will need to happen quickly to prevent a prolonged economic downturn, including unemployment. The scope for innovation, for a radically evolved jobs market, for new ways of working, is an exciting prospect.
In the words of Syrus “Anyone can hold the helm with the sea is calm.” Now, the seas are not calm, but that doesn’t mean that long-term strategies adhered to in peacetime don’t apply. This is precisely when long-term thinking is imperative. This is a temporary situation, and we believe that investors with a robust strategy should be considering whether their decisions are based on a situation that will end, or the recovery they want to position themselves for.
In the USA, public listed companies have seen a massive amount of share buying by senior management in March. This tells us executives believe at the prices recently witnessed it provided an excellent value for money opportunity.
Market returns for major indices
Below is a table showing the percentage returns of the major market indices to 31st March 2020.
The outlook for the year ahead
There are still many scenarios that can play out, which will determine the length, breadth and depth of the crisis. In turn, the economic consequence of lockdowns and the ability for economies to recover is highly uncertain with many different factors and variables at play, leading to the continued volatility in markets. The roll-out of significant fiscal measures helps to underwrite some of these unknowns. However, it is still uncertain as to how successful these programs will be at achieving their objectives. We can take comfort in the fact that governments are acting and not holding back in terms of adding stimulus to the economy.
There are still many other factors at play, some are positive, such as the possibility of preventative drugs being found that can materially ease the burden on healthcare systems or, on the downside, a second wave of infection rates in China or elsewhere and a need for rolling lockdowns, which would absolutely prolong the economic damage from the crisis. The truth is that no one knows what the actual outcome will be in the short to medium terms. We can have confidence that in the long term, the market will recover as it has always done in the past. Click here to view a MorningStar presentation on previous market downturns and recoveries.
Residential real estate is expected to see a reduction in value throughout the rest of 2020. It seems a fall of at least 10% is likely.
We are very fortunate to live in Australia. The management of the crisis is such a fine line between human disaster and economic disaster. The virus appears to be under control at present with very low new daily case numbers in the past week. Talk has started towards taking the first steps to relax the current restrictions and resume a more normal economy (& life). Three areas that will help Australia tremendously are:
1) The drought on the east coast is behind us so we can expect a bumper year from agriculture and livestock.
2) China's demand for resources remains strong.
3) The Australian Dollar has devalued making the above two plus all other assets in Australian Dollars relatively cheap.
Did you know?
A useful chart recently published by PIMCO demonstrates how, on average, investors trying to time entry and exit points for markets can impair longer-term return expectations. The chart below demonstrates an average investors’ experience during the GFC if they had moved to cash out of a 60/40 US equity/US bond portfolio in response to market moves. While the portfolio is hypothetical, the chart uses actual average flows data as observed by Morningstar in the US. When net flows eventually turned positive in early 2010, it was well past the significant rally in markets and on average, investors had underperformed. We see this phenomenon time and time again, leading to the saying that “investors, on average, underperform their investments”.
Final reMarc
The recession we are heading into will be different from those seen before as the current crisis is not the result of a bust after a boom. What we are experiencing is an enforced shutdown and a significant disruption – it was not caused by anything fundamentally wrong in the Australian economy. Because of that, we can be hopeful that once the virus is under control, we can recover and reach a more normal functioning in a quicker way than we have before. Adding confidence to this is that government and financial support programs – notably the wage subsidy and debt payment holidays – have been applied early and aggressively and should help offset protect many businesses and individuals so that the economy can bounce back reasonably quickly once the virus is under control.
"Never let a good crisis go to waste."
Winston Churchill
Key Facts & Figures
Australian Cash Rate was reduced twice in March to a record-low 0.25%.
Interest rates are poised to remain at current record low levels for the next 3 years.
Our annualised inflation rate is 1.8%. This remains well below the lower end of the RBA’s target band of 2 - 3%.
Australia’s unemployment rate is 5.2% as at March 2020 rising from 5.1% in February.
In the US, the Federal Reserve reduced rates in March with the range between 1.00% and 1.50%. The markets are pricing in no change for the next 3 years.