Coronavirus Investment Playbook – Part 5

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In the past fortnight, the ASX200 has bounced around 10% and from its absolute lows on Monday March 23rd around 4400, the market is up an impressive 22%.

Following the enormous government and monetary stimulus around the world, including the US Federal Reserve’s substantial US$2.3tln support package for states, small and medium businesses and controversially, sub-investment grade corporate debt, there has been a race to buy the market.

Fresh from the fear that gripped us only a few weeks back, the greedy side of the ledger is absolutely back in the ascendancy.

I would say that at the moment I have more incoming inquiry from investors worried that they have missed the low than I do about those concerned with being overly exposed to risk assets.

It’s quite startling.

To most, I ask ‘what’s the rush’?

As it stands now, countries around the world are faced with a slow and prolonged return back to normal in terms of exiting quarantines.

Over the weekend, the UK and France extended quarantines until early-mid May and even here in Australia where we have very successfully ‘crushed the curve’, the PM warned us this morning that we still had several weeks before we could consider an easing in restrictions.

We said May as a likely time for easing, and May it remains.

But to think that there won’t be lasting damage done to personal, corporate and government balance sheets, employment and the consumer psyche would be naïve.

The Fed and various other governmental authorities around the world are doing an admirable job at facilitating liquidity to an illiquid financial system, but this liquidity is a bridge to other side of COVID-19, and virtually all of the fortunate recipients of this much-needed liquidity will emerge weakened and less credit-worthy than when they began.

A very wise former colleague of mine over the weekend made an incredibly prescient remark that summed up the likely future as he saw it.

He said, that much like the global banking sector learned in the wake of the GFC, many other industries will soon learn that the ‘equity value of resilience is worth much less than the equity value of efficiency’.

His point being that as we emerge post COVID-19, business models are going to infinitely less efficient than when they entered the crisis as businesses are forced to operate with the health and safety of staff as their number one priority, with greater liquidity and likely with greater control over their supply chain.

Capacity utilisation is going to be less, capital employed is going to be higher, and as a result we should expect that equity returns will be lower, precisely the same way that the banking sector was forced to re-shape itself in the wake of the GFC amid the regulatory requirements to hold more capital.

For now, the return to normal remains highly debatable.

As every day passes we learn something new about the virus and its behaviour, its potential susceptibility to vaccine or its reaction to anti-viral drugs when used in treating severe cases.

Over the weekend there was some excellent news that researchers at Oxford University felt 80% confident that they could generate a vaccine for use by September, which is well ahead of the timeframe signalled by most experts, but even this would be unlikely to reach the mass market globally before Christmas given the difficulty in mass manufacturing biological drugs.

There is still a huge amount of water to flow under this bridge.

In the coming weeks and months in the real world, investors, households and corporates are going to continue seeking liquidity which is why we feel it remains entirely sensible to preserve the liquidity in portfolios we have built up and not to brazenly chase markets higher in what has been an incredibly aggressive market rally.

Truth is, no one really knows what the underlying earnings capability of many companies will be in 6-month’s time.

The coming 6 weeks of corporate reporting should provide with some greater clarity at least.

Expect a more detailed note from me in the coming few days, but in the meantime my colleagues and I sincerely wish all of you well.

Observations for the past week

Capital raisings continue apace

  • We have now had raisings from each of NextDC (NXT, $670m), Webjet (WEB, $350m), Cochlear (COH, $800m), SCA Property (SCP, $300m), Reece (REH, $600m), Flight Centre (FLT, $700m), QBE (QBE, $1.3bn), Oil Search (OSH, $1.2bn), Invocare (IVC, $150m), G8 Education (GEM, $300m), Megaport (MP1, $65m), Southern Cross Media (SXL, $169m).
  • Add in the Wesfarmers (WES) sell-down of over $1bn in Coles (COL) and the market has been tapped for over $7bn in new equity in the last 3 weeks, and seemingly there is plenty more to come.
  • All of these raisings continue to dilute earnings per share and the wider equity value of the ASX200 for the medium term.

US Weekly Jobless Claims skyrocket

  • Last week saw a further 6.6m Americans forced to sign on for unemployment benefits, taking the three-week total to 17m or 11% of the entire workforce.
  • Expectations are for a further 5.5m new jobless claims in his Thursday’s release.
  • A survey last week found that 60% (a staggering number!) of all workers under the age of 45 had been laid off, furloughed, had their hours reduced or expected to have their hours reduced in the coming weeks.

Looking ahead

  • Tuesday 14th April 2020: AU NAB Business Confidence (MAR)
  • Wednesday 15th April 2020: AU ANZ Weekly Consumer Confidence, AU Westpac Consumer Confidence (APR), US Retail Sales (MAR), US Empire Manufacturing (APR), US NAHB Housing Index (APR)
  • Thursday 16th April 2020: AU Employment (MAR), US Housing Starts/Building Permits (MAR), US Philly Fed Business Outlook (APR), US Weekly Jobless Claims (5.6m expected), US Weekly Bloomberg Consumer Confidence
  • Friday 17th April 2020: CH GDP (Q1)

As with the previous weeks, the key focus will be on the weekly jobless claims and consumer confidence figures in the United States as this data is the most current.

US corporate reporting season begins in earnest this week with major banks such as JP Morgan (JPM), Wells Fargo (WFC), Bank of America (BAC), Citigroup, Goldman Sachs (GS) and Morgan Stanley (MS) all due to report.

Next week sees IBM (IBM), Amazon (AMZN), Netflix (NFLX) and Tesla (TSLA), and then in the last week of April investors can expect results from both US tech majors such as Google (GOOG), Microsoft (MSFT), Apple (AAPL) and Facebook (FB) and from the first of the three major Australian banks reporting, being (ANZ) – NAB and Westpac (WBC) are the first week of May.

Friday 10th April, 5pm values

 IndexChange%
All Ordinaries 5439+333+6.5%
S&P / ASX 2005387+320+6.3%
Property Trust Index1166+160+15.9%
Utilities Index7604+299+4.1%
Financials Index4293+194+4.7%
Materials Index11542+590+5.4%

Friday 10th April, closing values

 IndexChange%
U.S. S&P 5002761+273+11%
London’s FTSE5842+427+7.9%
Japan’s Nikkei19043+1223+6.8%
Hang Seng24300+1064+4.9%
China’s Shanghai2796+33+1.2%

Key dividends

  • Tuesday 14th April 2020: N/A
  • Wednesday 15th April 2020: Div Pay Date – Boral (BLD), Carsales (CAR), Newscorp (NWS)
  • Thursday 16th April 2020: Div Pay Date – Rio Tinto (RIO)
  • Friday 17th April 2020: Div Pay Date – Cochlear (COH), Crown (CWN)

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

The information in this recording and article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this recording and article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this recording and article. Information in this recording and article is current at the date of this recording and article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

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