Last Friday we saw the Australian market go from an 8% fall to a 4% gain in a matter of hours. This level of volatility has continued throughout this week and shows the uncertainty and fear that is driving decision making. Traditional decision making methods for investing such as valuation are being ignored.
The US Federal Reserve cut interest rates by 1.5% this month from a range of 1.5% to 1.75% to a range of 0% to 0.25%.Yesterday in Australia, the RBA cut rates by 0.25% from 0.50% to 0.25%.
Investors are worried about weakness in the global economy because of:
more Coronavirus cases outside of China, and
a collapsed oil price deal.
This saw investors continue selling their shares because they are concerned about the short-term impact on businesses from these threats.
Implications for your portfolio.
Your portfolio is set up with risks like share prices falling in mind. We set it up with other investments like cash or bonds to help reduce the impact of this risk on your wealth. This is at the core of diversification and we have considered how your portfolio will function depending on the market environment. In periods like we have seen in the last month, your investments in cash and bonds will have continued to hold their value or even increased as share prices fell.
Importantly, your portfolio is expected to deliver, even after the current volatility, a long-term return that will meet financial objectives. You will have worked with your Financial Adviser to understand how much risk you can take with your investments. That work will continue to hold you in good stead through difficult times like this.
Looking past the virus.
China appears to have passed peak infections and has the virus under control as can be seen in the graph below of the daily new virus cases. China has told workers to return to work and 80% of factories are now open.
The rest of the world is yet to reach peak infection and uncertainty remains on whether the rest of the world will be able to implement measures that are as effective as China’s in containing the virus. At some point the fear around the coronavirus will pass and markets will return to normal.
There are steps being taken by governments to stimulate economies in what is most likely to be a global recession:
Governments around the world have woken up to the scale of the economic impact of the virus, and have unleashed trillion dollar fiscal stimulus measures.
Central banks have enacted emergency reduction in interest rates to near zero or negative.
Central banks have also earmarked quantitative easing. Quantitative easing is another term for printing money. In the years after the GFC many central banks used quantitative easing to support the financial system and economic growth. Australia did not need to at that time however, the Reserve Bank of Australia has earmarked that they will likely use it this time.
Oil prices have collapsed due to Russia and Saudi Arabia deciding that now is a good time to have a price war. Low oil prices are bad for some energy companies, however they are good for consumers including transport companies and will work to stimulate economies.
Finally, there will be pent up demand due to the lockdown so that when things return to normal, demand for goods and services will surge.
All these factors will result in a global economy that is positioned for massive growth when we finally come out of this. There are still a number of hurdles to cross before then and market volatility is likely to remain in the near term.
From a valuation point of view, shares are looking the cheapest they have in years. This opens opportunity for buying good companies at cheap prices however we expect the market volatility to continue in the short term and prefer to take a cautious approach to buying any shares at the moment.
Our strategy at this time is to wait until the virus’ exponential spread begins to abate before looking to increase growth asset allocations.
General Advice Disclaimer: The information in this report is general advice only and does not take into account the financial circumstances, needs and objectives of any particular investor. Before acting on the general advice contained in this report, an investor should assess their own circumstances or seek advice from a financial adviser. Where applicable, the investor should obtain and consider a copy of the prospectus or other disclosure material relevant to the financial product before making any investment decision to acquire a financial product. It is important to note that the price or value of financial products go up and down and past performance is not an indicator of future performance.