Firstlinks newsletter - 9 April
Hamish Douglass outlook, Bill Gates on lost time, survey on your views, simple covid maths, repay one trillion, new taxes, hybrids, is this different?
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It's well-established that the stock market usually rises well before positive data confirms a turning point. Although still volatile and fragile, there have been enough buyers for the stock market to deliver many strong days in the last month, even as 10 million Americans made jobless claims in only two weeks.
These are not just numbers, these are people losing jobs. That's an extraordinary number of consumers spending less, unable to meet rent or mortgage payments and worrying about medical bills. Moody's estimates 30% of Americans with home loans, or 15 million households, may stop repaying their loans if the economy remains locked up beyond their summer.
And yet even as everyone knows there will be a significant fall in global GDP, the 'snap back' argument gains momentum. Consider this consensus forecast for US GDP (and the US is about half of global equity market values). 'Consensus' is not one optimistic economist, it's an overall perspective. We have a global shut down in economic activity and although everyone is guessing, enough are wearing rose-coloured glasses.
Source: Bloomberg, Janus Henderson Investors, as at 1 April 2020. Projection is based on Bloomberg weighted average of consensus forecasts.
Back in Australia, we have seen about 150 of the companies in the S&P/ASX200 withdraw or downgrade their earnings guidance since the COVID-19 outbreak, confirming the pain is not confined to smaller companies. A recent ABS survey found two-thirds of businesses report cash flow reductions due to the virus.
It should be a stock-pickers market, with some companies at a discount of 30% to 50% of prices a month ago. Even participating in some of the heavily-discounted capital raising should give a boost to outperforming markets not available to index funds. This is often at the cost to retail investors, who are offered a fraction of the new raising and end up diluted by large funds buying at cheap prices. For example IDP Education raised capital at $10.65 and the share price closed the same day at $14.71. Cochlear issued at $140 and was soon back about $200. Webjet and Kathmandu both issued at half their last-trading price.
Conflicting headlines and politics
Nobody has experienced anything like this before, but it doesn't stop strong opinions. A leading US investment newsletter, Seeking Alpha, led a recent edition with 'Market recovery: sooner than most expect', then the next day, headlined, 'The worst is yet to come'. I found the second more convincing but that reflects my conservative bias.
Even the politics is confusing. Greg Sheridan, predictably in the right-wing The Australian, wrote "The Australian government's performance in this crisis has been staggering, proactive, of an almost unbelievable scale and, despite some obvious mistakes, strikingly effective so far."
Then on the next page, Steve Waterson wrote, "The government response to the coronavirus outbreak has been panicked, illogical, absurd and sinister."
Where do you stand? How are your investments performing? When will 'snap back' begin? Firstlinks is a community of readers sharing their views, so please take a moment to complete our survey.
Watch for super advice
ASIC has warned real estate agents not to provide advice to tenants on release of super to pay rent, saying:
“Financial advice must only be provided by qualified and licensed financial advisers, or financial counsellors, not by real estate agents who neither hold the requisite licence. The Corporations Act imposes significant penalties for a contravention of section 911A."
Here is a sample of a form (courtesy of The New Daily) real estate agents were sending to tenants who were seeking rental relief. It's comprehensive and far from a simple matter for the tenant, including what looks like a requirement to access their super.
In this week's edition ...
Hamish Douglass has switched his portfolios significantly to cash amid the current uncertainty, and he describes the turning points he is looking for. Microsoft Founder Bill Gates warned the world about epidemics in 2015 in a TED talk viewed 30 million times, and here's his view on actions required in the current pandemic.
Economist Hans Kunnen explains how Australia can afford a trillion dollars of debt, while Rodney Brown looks ahead to the days when we must start repaying it, and suggests we will face new taxes we should all prepare for. Then actuary Tony Dillon gives a simple maths explanation of why social distancing is so important for managing the virus.
Christopher Dembik raises an overlooked issue that retirees are now withdrawing their savings to live on, rather than investing more in the market, on top of the coronavirus weakness. Norman Derham records movements in the hybrids market and where opportunites lie.
On the point that the market usually recovers far quicker than the economy, Michael LaBella asks whether this time really is as different as many people are saying.
Howard Marks has also issued his fourth client memo in a month as he grapples with changing conditions, and we have updated last week's article.
In the White Paper section this week, Fidelity International provides a handy infographic outlining 10 key principles to help investors manage uncertainty.
Note that the ATO has produced a new 'working from home shortcut' which will allow people to claim a rate of 80 cents per hour for all their running expenses.
Also, we are now publishing regular updates to our website during the week due to the changing markets and number of new contributions.