Lockdown measures in Australia have now been put in place, and markets have reacted as the Australian Government has responded to the crisis. For nervous holders of Aussie equities, it’s worth remembering there are two situations to brace portfolios for: the course this pandemic will run, and the inevitable recovery.
Getting the facts right
Though the number of cases in Australia of COVID-19 seem relatively low compared to global counterparts, this virus is spreading quickly through a global population with no immunity, and faster than modern medicine and governments can keep up.
Australia is rated as one of the countries most prepared to cope with the outbreak, but it needs to be paired with a rapid response plan. Masses of people requiring treatment all at once – when regular flu season is on approach – is a significant consideration and concern.
Like much of Europe and Asia, Australia is also resorting to the basics to stagger the impact of the virus on its healthcare system – social distancing, isolation and quarantine.
The relatively sudden and highly disruptive impact on normal social functioning is, of course, having an impact on the companies and services which have enjoyed a period of predictable demand and a long bull run.
What we’re bracing for
Australia may need to make more pronounced moves to reduce the spread. These decisions, if taken, would rightly put health and well-being outcomes ahead of economic ones but would come with more market volatility.
Further, we expect now that Australia will experience two consecutive quarters of negative growth, causing the first recession since the early 1990s.
Though it’s hard to fathom at the moment, there is one important event we are bracing for also: a recovery.
As it stands, shares are likely to see further short-term falls given the uncertainty around COVID-19, both in terms of the duration of the outbreak in Australia and worldwide, and the extent of its economic impact even in the case of containment. However, for the next 12 months, we expect total returns to be helped by an eventual rebound in growth and supportive policies.
Measures we can reasonably expect from the government and central bank include:
- Quantitative easing.
- Policy stimulus.
- Fiscal stimulus.
- A cash rate cut.
It’s important to remember both of the realities to realise the panic will endure, and it will also end. Now is the time for careful, rational and long-term strategies to be an absolute focus, to ensure we get through this period without wearing the cost long-term.
Some golden rules
Here are some golden rules we are considering:
- Stick with companies who have good balance sheets for now.
- Be ready to assess capital raisings, as some companies will need to come to the markets for fresh equity and there will be some great deals on offer for new shareholders.
- Use the dislocation to high grade the quality of our portfolio.
- Be very wary of investing in some of those loss-making and high valuation sectors like IT, as the markets toleration for business models that need constant funding will change.
- We now must be close to peak panic, be an opportunistic buyer if we can, and if it suits our long-term strategy.
By Dermot Ryan, Sydney, Australia
