It has been five weeks that has changed the world. Whilst we cannot influence the economic impact of the COVID-19 outbreak nor manage the market’s reaction to it, we can keep you well-informed about what is happening in the economy and the markets and what it means for you. Our team are working hard to analyse events and help guide you to the best possible outcomes. This is a summary of the week that was.


Markets

Our Observations

Fear of the coronavirus’ impact on global growth means something approaching panic is present in the markets. We’ve seen record percentage drops with every one of those declines closely followed by a gain. Given that almost all of the biggest down days in the last 80 years were followed by up days, it is safe to say that the historical “buy the dips” strategy is alive and well.

Last night was another case in point with global sharemarkets across all regions posting consecutive gains for the first time since mid February. As the environment is governed by massive uncertainty, large price declines and very high economic risk, elevated two-way volatility should be expected.

What we believe is needed for investors to have high confidence that risk markets have found a sustainable bottom is:

  1. A stabilisation of growth rate COVID-19 cases in the world’s three largest economies – China (cases here have stabilised and declined for a month). Europe (things may be in the process of stabilising, but they are not declining) and the US (daily new cases are still growing);
  2. Declining credit spreads – which may have started in the IG space after central banks put their balance sheets on the line to support the market, but downgrades could test this;
  3. The financial sector has capacity to undertake intermediation again; and
  4. A restoration in private sector balance sheets – so this part of the economy can invest in capital and labour to enhance the recovery when public stimulus has faded.

This combination will provide a steadfast foundation to bring unemployment down and to create positive reinforcing feedback loops in terms of activity, profit, labour, market gains and investment.

What we can be sure of

  • The market bottom is the day before the recovery begins! No one can predict when this will be.
  • There’s no such thing in the investment world as a sure thing: Bitcoin, which partisans said would serve as a safe harbour in times of crisis, maybe down more than any other asset class. The price of gold historically the greatest source of protection against tough times, has declined several per cent over the last month.
  • We will recover. The world has, and will always have ‘worries’ Y2K, SARS, Peak Oil, Swine Flu, Brexit, Grexit, US Fiscal cliff/Default, Ghost cities, Bird Flu, Ebola, Oil Price collapse, Trump, North Korea/Iran/Syria/Turkey/ Russia, Climate change, Coronavirus.

What we can do

  • Stay InvestedInvestors may make suboptimal decisions when emotions take over, tending to buy out of excitement when the market is going up and sell out of fear when the market is falling. Markets do ultimately normalise, and when they do, those who stay invested may benefit more than those who don’t.

  • Be Wary of Investment BiasesClassical economic theories assume that we make decisions in a rational manner. But, behavioural science tells us that when it comes to making decisions, we’re much less rational than we think. Understanding these key concepts in behavioural science can help investors keep their emotions in check, make better decisions and achieve superior investment outcomes.Example – Would you be comfortable with an investment that behaves like this?

Probably not, so you may be alarmed to know that it represents the average annual growth of housing by capital city in the Australian residential property market.

  • See the whole elephantThere is a famous Indian parable that is taught in philosophy classes throughout the world to prevent absolutism and foster tolerance for the views of others. To paraphrase, six blind men are taken to “see” an elephant for the first time. One man feels the elephant’s tusk and declares that the elephant is like a spear, one man feels the elephant’s legs and declares that elephants are like trees, another man feels the trunk and declares the elephant is like a snake. Each man has a wildly different view of what constitutes an elephant depending on what part of the elephant they happen to come across. The parable ends as follows:

“And so these men of Indostan
Disputed loud and long,
Each in his own opinion
Exceeding stiff and strong,
Though each was partly in the right,
And all were in the wrong!”

There are few domains with as much noise and chatter as investing. Much like the six blind men in the parable, these opinions often have a grain of truth, but they are incomplete because the pundits tend to have major blind spots (pun intended) in their perspective and understanding of the issue.

  • Beware of statistical fallacyWhen the math adds up, the numbers never lie. They’re infallible, concrete, impossible to argue with, or are they?The charts below represent annual returns on Australian Shares.
    – The first plots negative returns only.
    – In the second, we add perspective with the addition of positive returns. In doing so, a decisively different picture is painted.

It is wise to protect yourself from statistical fallacy by being mindful of the author’s agenda.


Federal Government Stimulus

Earlier this week, The Australian government announced another round of economic stimulus to try and mitigate the economic slowdown caused by efforts to contain the spread of the COVID-19 virus. Many of these measures will be relevant to our clients and their loved ones and we encourage you to share this information. Should you have any questions please do not hesitate to contact us. Relevant measures include:

  • Changes to Account Based Pension Withdrawal Requirements
  • Early Access to Superannuation
  • Income Support
  • Reduced Deeming Rates.

For an explanation on each of these measures, please click here.


Please update your assets with Centrelink

For those clients who currently receive a Part Age Pension (or historically have been close but not made the asset test), we advise updating your details with Centrelink. As a consequence of portfolio values dropping, you may be eligible for an increase in your entitlements. Please:

  1. Contact your adviser for a Centrelink schedule
  2. Upload this via myGov
  3. Complete an Assets update.

‘Wealth’ is income generating not share prices

Last but not least, we leave you with a ‘note’ from our esteemed friends and allies in NSW, Stanford Brown Financial Advisers.

Well written, insightful and in alignment with our own approach, the note covers the following four questions:

1) ‘Why the sudden share price falls?
2) ‘Why the unusual speed of the falls?’;
3) ‘Should long term investors be worried’?; and
4) ‘How do I cope with the fact that I am now X% poorer?’

Full credit must go to the author, Chief Investment Officer Ashley Owen. Please click here to view the full article.


As communicated this time last week, here at FinSec we are being guided by the Government’s containment measures.

Whilst it has profound implications for the economy, the need to flatten the viral curve is of paramount importance. In the coming weeks we are likely to see an over-stretched health system and more business closures. In all these ways and more, the short-term news is bound to be bad – It’s indisputable. The only good news in this regard would be if it does not reach the levels people expect and the only way to achieve this is to follow the instructions we are given. Stay safe, positive and strong – This will pass and we will continue to get through it together.