Given the speed of the current Coronavirus situation, and the increased volatility witnessed across financial markets at present, we will be providing weekly updates to our investors over the coming months.
There is no sugar coating how quickly things have deteriorated over the last few weeks. What had started as a health crisis has quickly escalated into a financial panic, as the Coronavirus spreads around the globe. Most foreign governments have ignored the warnings of countries before them, and it now seems that the only measures to be made that can slow the spread of the virus is to implement serious social distancing measures, which will no doubt have a significant economic impact by slowing global growth. It didn’t need to be this way – Singapore, Hong Kong, and South Korea have stabilised their infection rates very quickly with incredible progress on testing, public area disinfection and social measures – but in some of the world’s largest countries we are only now seeing acceptance of the magnitude of the threat.
In Australia, just two weeks ago, we would’ve considered ourselves very lucky with the healthcare system we have, and the early steps taken by the government. However, the policies enacted to date are still not as restrictive as other countries. As an example, schools remain open for now, and there is no blanket ban on restaurants. Perhaps prior experience with SARS can explain why many Asian countries have responded so well, and this will probably be the Western world’s SARS moment, and we will be more prepared the next time.
For now, what should we expect to see next? We think we are likely to follow the steps taken by many countries in Europe. Restaurants, bars, gyms etc. will be forced to close eventually, while essential retailers like supermarkets, bakeries and restaurants providing takeaway or delivery will remain open. The Federal government is in the enviable position of having run a budget surplus and now is the time for the government to throw money at those businesses and employees that will be affected by this. How effective this fiscal response is and how quickly the virus is contained will determine the severity of the recession we encounter and how long it will take to recover.
From an investment perspective, what measures can we take? The market is now down over 30% from its recent highs, so there’s no doubt a significant recession has been priced into stocks already. Some companies are particularly vulnerable to collapse the longer the crisis continues – airlines, travel agents, casinos – and some will still be able to perform relatively well. We have kept a vigilant watch on the names within our portfolios and ensured we keep names out of the portfolio that we think could be vulnerable to collapse. We have already made a few discretionary decisions to exclude certain stocks.
As far as portfolio construction, we are starting to see stocks fall out of the Momentum strategies, so we are beginning to build a cash position. We envisage momentum to move to a full cash position over the next few weeks. That is a decision we are comfortable with as peak pessimism is not likely to be seen for at least a month or two in our view. In our opinion, stocks will start to recover once infection rates begin to slow, which will be a sign that businesses will be able to shortly reopen.
As long-term investors, we don’t encourage trying to pick the top or bottom and stick to a plan but with the view that we still have more bad news to come, earlier this week, we made the decision to sell down additional positions to further increase cash over and above what are momentum models are currently dictating. More so, it is important to remember that we have always carried a 20% weighting in non-equity style strategies, such as low volatility and macro credit (in the funds), which are not correlated to equity markets.
As of the close of trading on Wednesday, the make-up of the portfolios currently looks as follows.
Australian Equity Fund: Australian Equities: 61.4%, Macro Credit: 29.2%, Cash: 9.4%
Global Equity Fund: US Equities: 48.3%, Macro Credit: 31.3%, Cash 20.5%
Local Balanced: Equities: 67.3%, Bond ETF: 4.3%, Gold ETF: 4.4%, Cash: 23.9%
Low Volatility: Equity ETF: 24.0%, Bond ETF: 24.4%, Gold ETF: 25.2%, Cash: 26.4%
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.
