We are now a little over six weeks since global markets began keeling over in response to the rapidly deteriorating reality of the coronavirus pandemic. The human and economic impact has been staggering, and the stock market volatility has reflected a situation that no current investors have ever seen.
Internally, Rivkin has stuck to its systematic strategies but has added a discretionary modification – specifically, we have been excluding investing in names that have potential balance sheet issues if conditions remain severe for longer than expected. Some names seeing cash flow issues in the short-term, but which are likely to see a resumption in normal trading down the track are perhaps the best opportunities out there. But if they can’t survive a six-month decimation to revenues, then the upside is not worth the risk in our view. Additionally, we remain very concerned about the situation in the U.S., with the federal government very slow to respond to the situation and some states still refraining from issuing stay-at-home orders.
In Australia, we have been fortunate to have a federal government working very well with the state governments and this has meant that infection numbers have tailed off pretty dramatically over the last couple of weeks – in fact, we have been quite shocked about how successful the measures implemented by federal and state governments have been given they pale in restrictiveness compared to the more draconian measures in other countries such as Italy and Spain. Additionally, the relative health of Australia’s economy has meant that both monetary and fiscal measures announced have been staggeringly large – far above anything we’ve seen in history and certainly above our initial expectations.
So, how have all these events changed our views of the market? Assuming the recent progress in infections is sustained, we now think that the government will try to partly re-open the economy once infections approach zero. We should get some confirmation of this later in the week when the government releases its internal modelling. Assuming a rigorous testing and tracing regime accompanies any attempt to re-open the economy, there is reason to be optimistic that a lot of the lost GDP can start to thaw from hibernation and perhaps any further stimulus once the six-month wage subsidies expire will need to be far smaller.
Our main concern remains the situation in the U.S. As the largest economy in the world, it remains the case that when the U.S. sneezes, the rest of the world catches a cold. Yes, we remain lucky that Australia is so reliant on China which looks to be restarting its economy effectively, but an extended recession in the U.S. will do significant damage. So, we remain of the view that avoiding U.S. facing businesses is the prudent course of action for the time being.
With these views, we are going to begin decreasing our defensive weighting slowly over the next few weeks. As the market remains only 15% or so off its lows, the Momentum Strategy is likely to be at least partly in cash in the short-term, but as we don’t expect a rapid recovery this is not that much of a concern.
As of the close of trading on Monday April 6th, the make-up of the portfolios currently looks as follows.
Australian Equity Fund: Australian Equities: 59.2%, Macro Credit: 29.2%, Cash: 11.6%
Global Equity Fund: US Equities: 35.1%, Macro Credit: 29.9%, Cash 35.0%
Local Balanced: Equities: 58.1%, Bond ETF: 4.9%, Gold ETF: 4.9%, Cash: 32.1%
Low Volatility: Equity ETF: 24.7%, Bond ETF: 23.9%, Gold ETF: 25.6%, Cash: 25.8%
To note, there has been no change to the overall management of the low volatility strategy. It continues to hold near equal weightings of US equities, Australian dollar gold, bonds, and cash.
If you have any questions about your investments with Rivkin, please do not hesitate to call us on 02 8302 3605.
