WEEKLY E-MAIL

20 March 2020

CORONAVIRUS:

AN UPDATE ON OUR THOUGHTS

By Paul Nicol

The last couple of weeks have been more tumultuous than we have seen in a very long time with the COVID-19 pandemic causing anxiety and significant disruption to our daily lives. The scenes at supermarkets are a reminder that the prevailing emotion of fear can lead to particularly irrational actions and reactions.

Despite the current disruption, we wanted to reiterate that GFM is continuing to operate from our office, with sensible restrictions, to ensure during this particularly volatile environment we are here to assist our clients. In the event of a worst-case scenario that our office needs to close, we are well organised to work from home so there is no disruption to the support and advice we provide you. Our team is working incredibly hard at present, as you would expect during such a period. Please do not hesitate to contact me or any member of the team if you need assistance.

What now for the economy?

From an economic standpoint, COVID-19 is causing a simultaneous demand and supply shock, so rather than an economic slowdown, we are seeing almost a virtual economic ‘stop’ in activity particularly for anything travel or leisure related.

It is now inevitable that Australia, as well as other economies around the world, will undergo a short, sharp recession, albeit a technical one. In Australia’s case, the first-quarter GDP was already dragged down by the bushfire events and the addition of the sudden economic ‘stop’ means Q2 2020 will likely also be a negative quarter of GDP growth and lead to Australia’s first recession in 28 years.

Casting our minds back to the tumultuous period of the Global Financial Crisis (GFC), it is not hard to “connect the dots” and conclude it is the GFC all-over again. However, to-date Central Banks and policymakers have turned to the playbooks of previous crisis’, including the GFC, which should greatly support the global economy and provide some peace of mind for share markets.

The safety of our banks

Domestically, the banking system remains liquid and well capitalised. The big banks have evolved over many years to become oligopolistic utilities that enjoy some “exorbitant privileges” in pricing, guarantees and limited competition not available to other businesses. Much has been learnt from the GFC about how the financial system behaves in a crisis, placing us in a much better position than 2008.

The sharemarket

The anxiety of the significant impact COVID-19 will have on both the domestic and global economy has led to a significant flow-on effect to the sharemarket. Over the past fortnight, aggressive selling has seen three of the biggest one day falls in the history of the Australian sharemarket occurring in the last fortnight.

Graph 1 – Biggest 1-day fall in the Australian sharemarket

Source: MPW March 2020

In the current market, investors are focused on balance sheet strength and cashflows. As economies and many companies go into lockdown, the market is rewarding cashflows and relatively immune sectors (supermarkets & health) as the focus shifts to capital preservation. However, there certainly seems to have been some irrational selling.

In this landscape, the GFM Investment Committee have been looking at all the investments on our Approved Product List, which populate client portfolios, to ensure our clients do not hold companies with significant susceptibility or weaknesses which could lead to their demise (poor operational cash-flows, over-leverage, weak market positioning) and also assessing opportunities due to the aggressive sell down for companies most likely to rebound strongly once COVID-19 is under control. The subsequent 1 year and 5 years returns after previous share market crisis has usually been well above average, as shown in the table above.

Lessons learned from previous “bear” markets – some general rules for your portfolio

Of course, what we don’t know is when the share market will bottom out. With growing infection and mortality rates in Europe and the US, until we see a “flattening of the curve” markets will remain uncertain and volatile.

As bad as it seems now, history can act as some guide. Historically the average decline in a bear share market has been around 34%. At the time of writing, the Australian sharemarket has fallen 34%. This doesn’t mean that further falls cannot occur.

Graph 2 – All Ordinaries performance during bear markets

Source: MPW March 2020

During these times, for those in the drawdown or pension phase, cash is king. It is important to ensure that if you are drawing regular living payments from your super fund or portfolio, you have sufficient liquidity in your portfolio (cash or cash equivalents) and that you don’t need to sell down your investments at significantly reduced price levels.

For the accumulator, the current market sell-down should be seen as an opportunity to strategically further invest in your portfolio as a part of a well-planned, long term strategy.

All that said, the most important message before anything else is to protect your health and safety and that of your family members. Be vigilant, follow all the hygienic recommendations and limit as much as possible where you go over the coming weeks.

We will be in touch again next week.

Paul Nicol

Managing Partner
Senior Financial Planner
SMSF Specialist Advisor™
Barron’s Top Financial Adviser 2017, 2018 & 2019
Authorised Representative No. 230876

If you have any questions or comments, please email me at paul@gfmwealth.com.au

Disclaimer: This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution. The information here is of a generic nature, and does not take into account your investment objectives or financial needs. No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.

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