Market Update - March 2020
Firstly some good news.
The market falls began in February and that month saw the Australian share market down by 8.08%, and the US share market fell by 8.41%.
The results for the same period for our portfolios, after fees were;
DMG Diversified Portfolio (DMGDP) -2.03%
Clearwater Dynamic Portfolio (CDP) -3.13%
These results demonstrate a healthy level of protection and limiting of losses.
What’s happening?
Financial markets were struggling under the weight of the Coronavirus when Russia and Saudi Arabia started a price war over Oil that sent shockwaves across the energy industry and led to the most significant share market losses since the global financial crisis.
We are experiencing a high number of large daily movements in both directions, but mainly down, in the share markets that we understand is unsettling and want to update you on the portfolios, the markets and some longer-term research.
There are several contributing factors to the current situation. These include;
Share markets were expensive, and an unexpected event like this creates a lot of fear.
The delayed reaction to the virus by financial markets, finally catching up.
The spread of the virus outside China.
Frequent headlines about new cases.
Greater focus on the short-term risks by larger investors who sell down
The Oil dispute.
Interestingly, during this period, a common question or at least thought is ‘should I sell?’ At the same time, others ask ‘is it a good time to buy?’ This demonstrates how much uncertainty there is at times like this and also how differently we can react.
No-one knows if it a good time to buy or sell. Shares are cheaper now than three weeks ago, but they were expensive then and not many are likely to be cheap yet. Selling will protect you if losses continue, but there is a strong likelihood that you will miss the early stages of the recovery. You may gain peace of mind, but the financial benefits may not be worthwhile.
This week we expect to see Governments and Central Banks step up their support of the economies and markets. Interest rates cuts and Government support will help, and markets should respond positively, but they won’t take the place of a vaccine or a sustained decline in infections and deaths. With interest rates so low, the Central Banks are limited in what they can do. Governments need to go into debt to spend, and while this sounds simple, there is already so much debt, it is not that easy. We need a medical improvement before the financial markets have sustainable confidence restored.
The restrictions in place on a growing portion of the population are negatively impacting economic growth and company profits. Already we have seen some terrible economic numbers out of China. There will be talk of recessions in many countries, and this is the big fear for sharemarkets.
No-one knows how large the financial impact will be and how much further the share markets will fall because of this. The same applies to when the recovery will occur and how sharp it will be.
What can we learn from past events?
This chart demonstrates the history and past crises. It gets updated and wheeled out every time there are significant market falls. Share markets do recover.
Source: ASX, AMP
Despite how bad things are, the evidence about how investment markets are impacted and respond is clear. They do recover. Here is another popular table.
Source: Bloomberg, AMP
It indicates that most likely, we will see more falls before a healthy recovery. When and how much, no-one knows. Don’t rely on the average number in the table as averages aren’t reliable. Look at the ranges in each column for what could happen.
What are we doing with the portfolios?
Our Investment Committees are meeting regularly, along with weekly meetings of some members and occasional special meetings of the full committees. We are doing our best to consider our allocations and holdings and that we are positioned appropriately for you. We continue to meet regularly with the managers we use and are also having additional meetings with them when we want a further update about their positioning and their views on the markets.
For the DMGDP, we entered this recent period with a slightly more defensive allocation than our target. We also have confidence in our defensive holdings delivering what we expect. After making a number of changes last year to better prepare for events like this, we are comfortable with our positioning. However, we do review this and are prepared to make changes.
As concerning as the markets are, the CDP is in the fortunate position of being able to take advantage of the falls. We have cash from new investments, including our own, coming in to the portfolio that we can invest at reduced prices. Timing the entry points is impossible to get right consistently, but we will continue to take advantage of the opportunities.
If you require any further information, please feel free to contact your financial planner.