07 May Riding out the Coronavirus storm | Market update as at 7th May
Written by David Graham, Senior Financial Planner, Mapp Fin CIMA® CFP®
Is it just me or have the past few months messed with our perceptions of time? In the words of Lenin “there are decades where nothing happens, and there are weeks where decades happen”. The past 10 weeks have proven this. The next 10 weeks may prove again.
Our last general update was written on the eve of the current crisis (Corona-tion 25 February 2020). Much has happened and much has changed since then. Reflecting back on that last update, much of what we outlined has come to pass, so far; a severe market reaction, a ‘whatever it takes’ response from Governments and Monetary authorities, increased market volatility.
I am certain you have more than enough information about the virus, and there is nothing insightful we can add. Therefore, we will stick to our area of expertise.
Markets have largely discounted the effects of the shutdown, and started to factor in the responses by Government authorities. Pricing risk remains uncertain, so volatility remains an issue. However, markets have adapted to what they perceive as the near-term risks to economies and the fortunes of businesses. Greater clarity will promote confidence and portend a return to ‘normal’ market conditions. However, normal does not mean the way things were before; at least, not in the short term. Perceptions of risk have changed. Companies, and in some cases entire nations, have realised there are risks in simply picking the cheapest supplier. If your suppliers were all situated in Hubei province, you had no ‘plan B’. If your business relied on cheap air travel, boom. Economies will be less frictionless than before as companies (and nations) adopt a ‘plan B’. More friction means lower growth. Economic reform can mitigate this drag, but it is far from clear what reforms will be appropriate. The Globalisation driving growth for the past 4 decades is in its worst state since 1930.
For us, the irony of the lessons above, is that it has always been the way we approach investment; always diversify, have multiple redundancies built in, weigh the comprise between cost and value. There is always a trade-off. We just need to decide which ones we can live with.
The outlook remains opaque. In our last message, we talked about timeframes. We remain amidst the shorter end of that timeframe. Even with the virus under control (whatever that means), the economy will take some time to recover. There is a risk that when Government support lapses, gaps will remain. Even if this is not the case, it will take some time for confidence to recover. After an initial burst of relief, we believe people will be more circumspect about what can go wrong. It has been 28 years since Australia has been through anything similar. Therefore, an entire generation will be learning the real meaning of risk management, in a truly personal sense. This too will lower economic growth expectations, but I would argue this growth can be more sustainable and robust. Then again, I would.
Those of you who I have dealt with directly will recall I have always cautioned against return expectations, particularly when they have been strong for a period. We have always been conscious of protecting against downside risk. I cannot emphasise enough that current events are still playing out and investment values may fall further. Company earnings are falling. Dividends are being cut. Things look, well, kind of crap.
However, I challenge you to raise your eyes and look beyond short term concerns. On a purely quantitative basis, and notwithstanding a less efficient economy going forward, long term investment returns, for some of the most beaten up asset classes, are as attractive as they have been in about 10 years. With the risk free rate (10 year Government bonds) below 1%, the rate of return threshold is as low as it has ever been. There is no rush. However, as perfect as the investment landscape looked as recently as January, is it not as likely that things are not as imperfect as they now seem?
I will end by mangling the preamble to the U S Declaration of Independence. In terms of investment ‘we hold these truths to be self-evident’.
- Returns are mean reverting. They overshoot long term averages as sure as they undershoot.
- Sticking to a rational and considered process produces more consistent risk adjusted returns.
- Personal investment objectives, however you articulate these, are the only benchmarks that matters.
- Humility is essential. Markets teach lessons daily. It is up to you how much these cost.
- If something is too good to be true, it probably isn’t. All investment returns are a factor of the risk you are taking. Sometimes, the risk you are taking is not obvious.
We look forward to enjoying better times with you, in the near future.
Disclaimer: the information and any advice provided in this email has been prepared without taking into account your objectives, financial situation or needs. Because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to those things.