Thoughts from the Investment Committee
Until recently the recent gyrations in financial markets had been compared with the 2007 – 09 global financial crisis. Now some elements of both the popular and more professional business media are looking to October 1987 (some 33 years ago now) to find a precedent to the wild swings that we are now seeing.
Much of the financial market commentary has been excellent but still only encourages us to know everything there is to know about the market volatility but no closer to best deal with it. In a recent memoir, former US UN Ambassador Samantha Power noted that the then President Obama often warned her against ‘admiring’ a problem and called her out when he viewed her comments as dogmatic or sanctimonious1. We were keen to write to you directly, not with the intention of ‘admiring the problem’ of the recent market swings but perhaps offering some thoughts how to position yourself for an eventual recovery.
As at Monday 23 March, both Australian and international equity markets were still on a roller coaster.
S&P/ASX 200 Benchmark Index (to 20 March 2020)
Dow Jones Industrial Average (to 20 March 2020)
Obviously here in Australia, we are now seeing the effect of the Coronavirus as our communities go into a ‘lockdown’ mode which may bring a chill into our lives that we have never experienced. The combination of concerns about personal health and the financial environment is understandably stressful.
Some thoughts to keep in mind:
- Quantitative Easing has arrived with the Reserve Bank of Australia purchasing $5 billion of bonds on Friday last week which helped lower the three-year bond rate towards its target of 0.25 per cent and restore some order to the fixed interest markets. The move reflects the RBA’s determination to keep down the borrowing costs faced by businesses and households.
- Credit spreads have widened and there are some market observers who forecast that there may be opportunities in fixed interest as the crisis shows signs of passing.
- There is the possibility that housing prices may flatten or fall as buyers and sellers put transactions on hold. Historical references should come with a disclaimer but during the GFC, the share market fell by 55.0 per cent house prices fell by 7.0 per cent2.
- No individual investor or professional financial institution will know when equities have bottomed. Knowing when the best time is to ‘bargain hunt’ is a gift that only those with 20/20 vision possess. What can be said with some certainty is that any pull back in equity markets can gradually allow astute professional investors to come back into the equity market when they feel that the fall in prices justifies the risk. In very broad terms, some of the professional fund managers that we regularly speak to have done this selectively in the past with some success.
- Volatility is here to stay so it is best to get used to it. Do not be overwhelmed by seemingly large market falls (say on global markets overnight) and then euphoric about what seems like a recovery from a bad dream when there is swing back for a moment.
- REITs have been hit hard as many Australian REITs have a significant retail exposure. There is significant volatility as the market struggles with how Corona virus effects shopping centres and retailing generally. REIT price volatility is significant enough to make investors wary of making any rash decisions. On Thursday last week, Scentre Group which manages the ‘Westfield’ centres fell by almost 17.0 per cent but was up by almost 8.0 percent on the Friday.
- It’s a big topic that is unfolding but some funds management organisations are eyeing those financially strong companies where the potential dividend yield offers appeal.
- We as financial advisors are not especially handled to comment on the public health issues, but it appears that Coronavirus cases in China are declining with China getting closer to recovery and returning to work and production.
- Stay safe and please feel free to contact us directly if you would like to discuss any of the issues raised above in the context of your current investment strategy.
1 Power S, Education of an Idealist, Dey Street Books, 2019
2 Hughes D, Virus Will Hit House Prices, But History Offers Hope, Australian Financial Review, 21-22 March 2020