We are starting to see signs that equity markets, both in the US and in Australia are putting in short-term lows this week. Volatility is reducing rapidly (from admittedly extraordinary high levels) and the momentum of the decline is dissipating, which is often a precursor to a reversal in the trend.
The catalyst is a bit unknown; central bank and fiscal stimulus measures have been historically unprecedented but governments and central bankers had already been effectively saying that they will do ‘whatever it takes’, so in our view we have passed the point of peak negativity when all shares had been sold down irrespective of the short-term hit to revenues and what the future would look like beyond this crisis. It is important to remember that stock prices are likely to bottom well before the narrative becomes positive.
The simple fact is that, on the balance of probable outcomes to emerge from this outbreak, the market had been oversold and a rally was overdue. Now, where we go from here will depend on how effective the policy responses will be to keep small businesses and workers financially supported and how long this disruption will last, which ultimately means the biggest determinant will be the effectiveness of each country’s handling of the outbreak. The US Senate is debating the final look of a US$2 Trillion assistance package in the US at present, and while this is an enormous amount of money to throw at the problem, the general consensus is that still more assistance will follow in the weeks ahead.
In Asia, we have seen plenty of countries get a handle on their outbreaks and some economies are functioning relatively well. In Europe, we are now seeing widespread lockdowns and early signs that this is slowing down the outbreak in Italy and Germany, and hopefully the UK, France and Spain will show improvement in the coming days. In Australia and the US, we are a few weeks behind as far as social distancing measures are concerned and it remains to be seen how each country will attempt to restart their economies. If South Korea is the model to be followed, a huge testing regime with technology assisting infection tracing is key and could mean that once the outbreak is contained we could see businesses reopen.
From an investment perspective, stress-testing one’s portfolio is vital to ensure little exposure to stocks vulnerable to collapse if the economy remains shut-down for an extended period. Companies with high debt levels and serious short-term cash flow issues, while having the most upside if things recover quickly, are not worthwhile on a risk/reward basis. There is enough upside across the market to be able to avoid the riskiest names and still enjoy a recovery in one’s portfolio if things improve quickly, while avoiding the unnecessary downside if the outbreak is protracted.
On Monday of this week, we re-balanced both the ASX100 and ASX200 Momentum strategies with the Australian Equity Fund and Local Balanced. As a reminder, both strategies hold eight names each when fully invested. This week however, we saw only five stocks appear in each list, as the pool of up trending stocks diminishes. What this means, is that the cash weightings in the portfolios continue to move slightly higher. All of our equity strategies are currently invested in equities between 55-65%, with the remaining balance either in cash, or non-equity asset classes, such as bonds and gold in the case of Local Balanced, and a macro credit strategy in the case of both the Australian and Global Equity Funds. Tuesday next week is month end, meaning we will be aiming for Friday the 3rd of April to publish our monthly performance reports. Within these reports, we will further update investors of our current exposure to stocks, cash, and defensive strategies.
As of the close of trading on Wednesday 25th March, the make-up of the portfolios currently looks as follows.
Australian Equity Fund: Australian Equities: 57.0%, Macro Credit: 30.0%, Cash: 13.0%
Global Equity Fund: US Equities: 44.9%, Macro Credit: 28.4%, Cash 26.7%
Local Balanced: Equities: 62.6%, Bond ETF: 4.3%, Gold ETF: 4.7%, Cash: 28.4%
Low Volatility: Equity ETF: 23.7%, Bond ETF: 24.3%, Gold ETF: 26.1%, Cash: 25.9%
If you have any questions about your investments with Rivkin, please do not hesitate to call us on 02 8302 3605.
