'The long-term bounceback will be strong'
The coronavirus fallout is hurting but there should be a treatment by year end and the rebound will be strong, says Morningstar director of equities Johannes Faul.
Lex Hall: Hi, I'm Lex Hall, content editor with Morningstar Australia. I thought today I'd catch up with the director of equity research, Johannes Faul, to talk about the plunging markets, what it means, what the outlook holds and also, to look at some stocks that are in buying territory.
Johannes, thanks for your time today.
Johannes Faul: Thanks for having me, Lex.
Hall: Now, someone yesterday, I think, said this is the correction we had to have. Markets have plunged to levels not seen since 1987. Is this the correction we had to have, do you think, do you agree?
Faul: Oh, as in the decline we have seen, sharp declines…
Hall: Yeah.
Faul: …since 1987, I think the markets are still a bit higher, thankfully. But look, you know, that that point on the correction, if we look back a couple of months, at Morningstar, we were seeing the markets overvalued on average. So, if you took our average coverage in Australia and weighted that by the market cap, we were saying, hey, the market is 20 per cent overvalued.
Hall: Yeah.
Faul: There's a lot of downside risk here. The one takeaway, though, is that in our view, the sale is overdone, and we see a lot of opportunities emerging actually for investors in the Australian market to take an opportunity here and buy some shares.
Hall: Yeah. Well, as we said today, I think, there’s a stock list here of about 50 stocks or so that are 5-Star currently, so there are buying opportunities out there. We'll talk about that in a sec. What do you think the short-term outlook is for Australia, and the long term? What's the short term?
Faul: Yeah. Look, I mean, Morningstar's healthcare strategist in the US, Karen Andersen, came out with a very interesting piece. And what she's done, she's done a very deep-dive analysis on how have previous pandemics played out. And based on those figures, plus the outlook, that we'll have a treatment most likely by the end of this year, maybe even autumn, the northern hemisphere autumn, coming up. So, this will be a short-term issue, the health issue. Obviously, there's other repercussions, secondary knock-on effects and people are perhaps rightly so worried about the financial system. But what we've seen from the central banks and politicians globally is a lot of monetary easing, a lot of fiscal stimulus already coming through and they've acted very quickly, which really abates that risk. So, when we think about the global impact, it's going to be material. It has already been material. The Chinese numbers came out overnight, and how far their economy is slowing. We've talked about that, and what that means for Australia. But the short-term impact is going to be material; but long term, we think this is going to go away and actually with all this stimulus, with all this easing happening, we see the bounce back will be quite strong.
Hall: OK. Yeah, after SARS, for example, it took about six months and then we saw a rebound. So, hopefully, we'll see something like that. And as you say, we're already seeing this morning, Tuesday morning, we're seeing a slight bump. BHP is up 8 per cent, for example.
Faul: Yes.
Hall: You were saying that is linked to China and…
Faul: Perhaps, perhaps and look, markets are still very volatile. And it reminds me of a decade ago when large indices, like the S&P 500, were whipping around quite a bit. We're talking 5 per cent moves overnight, up or down. And it just – all this volatility to me – suggests a lot of people are in the dark a bit, like, ‘What does this mean? How severe is going to be the impact?’ We looked at a few studies from the mid-90s, which gave different ranges of short-term GDP growth impacts of pandemics and they range, obviously, between, low – very low single digits up to 10 per cent. In our mind, in our weighted case, we think that GDP growth this year will be slammed by 2 percentage points.
Hall: OK.
Faul: To put that in perspective, the IMF thought earlier this year, in January, GDP growth would be 3.3 per cent. So, we're taking a bit sliver off that. We're not thinking there's going to be a global recession at this stage.
Hall: OK. Let's turn to buying opportunities and stock picking. Like I said, we've got a list here of 50 stocks that are in 5-Star territory.
Faul: Yes.
Hall: Are they all buys? And you were mentioning earlier that it's very important to take into account companies’ balance sheet. Like consumers, like retail investors, they have debts and bills that they've got to pay, and that's the big problem for small businesses in the short term. Some of them won't survive. Tell us about evaluating 5-Star stocks and looking at the balance sheet.
Faul: Yeah. So, I think that that's a very valid question what you say and I think it really needs to be looked at on a case-by-case study, or just by case by case, in terms of: how do these companies balance sheets actually look? Are they strong enough to withstand three months of this, six months of this, 12 months of this weakness? We obviously don't know how long is our economy going to slow for. But look, we're seeing, we're seeing China coming back. They're returning to work. Their workers are returning to the offices, their workers are returning to the factories. And it's been a couple of months. It will take some time to revamp everything.
Hall: Yeah.
Faul: But if you think about the capabilities, the capacity of the economy itself, that hasn't been touched by the coronavirus. It hasn't destroyed any machinery or such in that sense. So, we think…
Hall: People have just stopped, activities have stopped.
Faul: Exactly. We've just ground to a halt. And it's been an abrupt one, too. Again, some sectors, some industries are hit harder than others.
Hall: Yeah.
Faul: And we can talk about supermarkets versus airlines for instance.
Hall: Yeah.
Faul: But we think that it will be short term, that demand will bounce back. And again, circling back to our house view is, yes, a severe near-term impact on GDP, but longer term I think there's going to be strong bounce with above trend GDP growth, over three years, as we bounce. And then, long term in terms of total global output, we think we're only going to be a bit of a sliver lower in 2024 than we would have been without corona only by 0.3 per cent.
Hall: All right. So, Johannes, overall, you see a vaccine. Our research suggests a vaccine within a year-and-a-half perhaps and world GDP to recover.
Faul: Yes, absolutely. So, our research suggests there could be a treatment out early, so by the end of 2020. There could be a vaccine by mid to late 2021, that's our view. And hence, once corona is gone, and we can manage it, we think the economy is going to bounce back, and bounce back strongly. So, again, it's just a short-term impact, in our view.
Hall: All right. Well, you're in the middle of preparing a report, which will be out later this week, and we look forward to reading that. So, thanks for your insights.
Faul: Absolutely. Thank you, Lex.
Hall: I'm Lex Hall for Morningstar. Thanks for watching.