2020 hindsight so far...

Everywhere we look, we see that the best managers and money advisers are never fully invested.

There is a science and a discipline around asset allocating and as we’ve always said, for individuals it’s a very personal process. Fund Managers and such like are not concerned with people’s actual personal financial position. To our mind, this is a really important distinction between our roles.

As we ponder with 20/20 vision today’s hindsight, we can observe that April 2020 is nearly the best month for the S&P500 since 1974. Now initially, that’s a disturbing statistic - especially if we’ve been sitting on lots of cash. And yet that view is something of a value trap. No-one knows what will happen tomorrow - let alone, next week. In ten years, we’re extremely confident but meantime, a lot of industries and businesses will change. Investors needs and tolerances may also change.

Today’s headlines (29th April 2020): The Federal Reserve kept its main interest rate close to zero (0.25%) and warned of lasting “medium term” economic damage (due to the pandemic). In a press conference, Fed Chairman Powell said, "this is not the time to be concerned about debt”.

Initial data suggests the first quarter US GDP fell by 4.8% - a likely prelude to a much worse Q2 set of numbers coming. In Q1, personal consumption in the US fell 7.6%. We’re just one month into Q2 and the Share Market has gone gang busters. But we must frame that success with a warning sign: The deepest recession in nearly 80 years is underway” (ANZ).

The Share Market has bounced, because Governments have reached down to their deepest pocket, to help us all hold and hunker down. It’s that confidence in Central Banks that’s now underwriting the current strength of all Share Markets. If that confidence is justified, then we’ll see earnings recover and those sectors still struggling (i.e Real Estate and Infrastructure) will also bounce higher. But, if this initial confidence is mis-placed, then much of today’s share price recovery will be given straight back. We are in the early stages of an endurance race and we’ll need to place our steps carefully.

2020 has experienced the most severe economic event in one hundred years. Given the Share Market is a weighing machine, how has it measured the impact to the global economy? (YTD to 29 April 2020):

Market Direction Local terms

S&P500 (USA) down 9.01%

Japan (Topix) down 15.81%

Germany down 16.16%

UK down 18.82%

China down 3.80%

Australia down 19.31%

New Zealand down 7.19%

NZ’s market is very inefficient; by way of example, A2 Milk and Fisher & Paykel Healthcare between them represent 20% of our market. Guess which two stocks have been the best performing in the NZ market?

The point is, in your lifetime and likely the lifetime of your parents, if this is the worst economic disaster to impact the world, a correction of between 10%-20% means we get off very lightly. I remain cautious about the near term and confident that as we are already invested, we do participate in this recovery.

I also remain of the view that we cautiously add more capital to these markets but there’s no play book, it’s not a normal correction. Stay diversified, continue to be brave. Hold onto quality. My challenge in the coming weeks and months is to continue to test our resolve for retaining positions that may struggle in our new world order, beyond the next two to three years.

Year end reports are being sent soon – these will reflect a year that no one wants to report on (from a performance perspective). For those who have been invested for a while, the three, five & ten year performance numbers reconfirm, success for investors remains in the long term.

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