A pinch and a punch and a very unusual month
You may be hearing economists speak of the “output gap” - the void that is being created by workers confined to home; the cost to the economy of a shutdown that will last six to eight weeks and the repercussions of that which may last for years to come.
The obvious and immediate casualties here are the airliners and airports. While I have every confidence that the airports will survive, the airliners will need the support of Governments. Indeed, vast parts of the economy will need Government to see them through and so far, we’ve seen a strong and relatively swift response from sovereign states and this, should give us much hope.
Governments are presenting packages to prop up businesses and workers. The extent of those packages varies greatly between nations. Singapore and Denmark seemingly have taken the entire cost of their output gap into their nations balance sheet (holding their citizens and businesses in their pre-crisis position, enabling a quick turnaround as they come out of this), while Germany’s compensation plans look to absorb 70% of their nation’s disruption.
In the rest of the West, the economic pain is going to be felt mostly by businesses, the cost falling to property owners, utilities, banks and people in general. Don’t get me wrong, the response from Western Governments has been substantial and it will head off what would have otherwise been dire economic outcomes but, we should still expect a recession to follow. How deep and how long, no one can say. The real concern is for those countries in regions such as South East Asia, Africa and India, where the reports I’m hearing suggest Depressions may form, as their nations struggle to isolate and financially support their massive populations.
The situation today remains very fluid, we’re not going to know the answers for another couple of months and even then, we still likely won’t know. This is a marathon, not a sprint. Quantitative Easing is likely how this works, with interest rates much lower for much longer and the solvency risk of some countries escalating as they take on larger debt loads. Watch Europe cautiously.
Let’s talk about the markets: As we’ve written before, the Share Market is a weighing machine, prices reflect the movements of investor sentiment on a daily basis. This last month, prices fell as frightened investors sold to hungry investors (yes, the lower prices being set by those who wanted out early). So, who is right about the price - the buyer or the seller? Well, in the long term we know it’s the buyer. So, in this time of unprecedented change, what future can we expect… and when?
Things will change. Who could have imagined the part of an investment strategy considered defensive, containing essential Infrastructure assets such as airports and utilities, would fall 20-50% in less than a month? Do we think these assets rebound? We think they can but, we must also be mindful of the risk to even so-called “Investment Grade” companies that can be downgraded at this point, as equity and debt ratios change on the value of today’s shares. In that regard, those ratios are created and measured by institutions and so I imagine we may yet see further Government responses because, this is not an isolated event, we’re all in this together.
On Tuesday, investors focused on signs that in the USA, Congress could deliver a fourth round of stimulus as the virus spread deeper. President Donald Trump was reportedly seeking a further $2 trillion infrastructure package. The US dollar fell and crude Oil pushed back above $20 a barrel.
In that regard, Crude oil prices (WTI) fell a breathtaking 70% from their 2020 high of $65.65 on 8 January 2020, to their low of $19.27 on 30 March. On top of that, global fuel demand fell sharply due to travel restrictions. Forecasters believe demand for oil will slump even further. Not only do we have a demand side crisis, Oil has a supply side crisis. To all petrol heads, now is the time to buy that classic V8 you always wanted. In reality, you don’t need a V8 (sorry), despite the fact that you can now buy a barrel of Western Canadian Select Crude Oil for less than the cost of a beer (tell me when that was last a fact!).
From a historical perspective, while today is a clear buying trigger in so many markets, there may well be a few more buying triggers in the coming weeks and months, so don’t commit everything on current weakness.
That really is today’s message.
Investors are at a crossroads, questioning whether extraordinary stimulus by countries and central banks can counter further retrenchment of firms and consumers, as the outbreak spreads.
One measure of the market collective is the Dow Jones Industrial Average (it’s been around since 1896). The Dow Jones index started out as a collective of companies reported by the Wall Street Journal. Ten in all, and one name in that mix that you’ll still recognise was General Electric. These days the Dow is represented by 30 of the largest businesses in the United States. General Electric fell out of the Dow‘s collective in 2018. A remarkable run. Anyway, in 2020 the Dow Jones Index recorded its worst first quarter decline, ever! So, what now?
One of the commentators to whom I subscribe wrote just last week: “There is only one thing that stands between us and what happened in 1929 and 1930. Governments need to underwrite their economies whilst we fight this war. Many, many millions of people will lose their jobs for no fault of their own. The private sector economy is closing down across much of the world. This is the time that governments need to provide a bridge across the economic chasm beneath us and today it seems as if we are going to see government intervention on a scale never seen before, because we are witnessing economic dislocation on a scale never seen before. This will create HUGE problems down the road. We’ll deal with those problems later. And we will.
We are seeing a massive coordinated response – it simply has to give us confidence, that we will emerge from this intact, but it’s going to take a long time to sort out. We do not want to be selling quality assets at rock bottom prices and so to our mind, right now cash is king. Where we were positioned going into this may not be how we want to be positioned coming out so, we are reviewing the portfolio components all of the time. There will be moments of strong recovery, don’t worry if you have cash side-lined and feel as though an opportunity has been missed. We are already invested and so we will participate in the recovery, we need to be mindful of avoiding the pull backs that will inevitably also occur. Remember, the Market reflects the recovery before it’s in full swing.
Take care – I hope this was useful. Remember, expect volatility and keep your eye to what the world looks like in three to five years’ time, that’s where we’ll be investing.
Tony Munro | CFPCM, Post Grad Dip. Bus.Studies (PFP), AFA, FSP 5501