The first quarter of 2020 saw markets reckon with the emergence of a significant pandemic for the first time since the Spanish Flu a century ago.
All but the safest assets were affected, with Australian equities down 23.41% and international equities down 19.97% as at 31 March 2020. The Reserve Bank of Australia sought to minimise the impact by reducing the cash rate twice in March; taking it to a record low of 0.25%. This saw the Australian 10-year government bond gain 3.81%1as yields fell. See more detailed analysis of the performance in the Quarterly Market Update.
In the video below, Andrew Garrett, National Investment Specialist, Perpetual Private provides an overview of the current market situation, both in Australia and globally. He discusses some key areas of weakness and the opportunities in private markets for managers of alternative assets. He asserts that while it’s hard to foresee the full effects of the pandemic, having a good solid plan in place will help ensure that investors (particularly those in retirement or approaching retirement) avoid overtrading, locking-in losses and ultimately destroying the value of their investment portfolio.
The COVID-19 pandemic and the ‘great lockdown’ has effectively put economies into hibernation
Undeniably COVID-19 has significantly impacted the way we can now live as well as the performance of financial markets, which go hand-in-hand. What we've seen is the genesis of a medical crisis. The impact of the virus was first seen in China in November 2019; it has now developed into a widespread economic crisis as governments around the world have restricted travel and implemented a range of measures to stimulate growth and minimise the economic and social impact of the rising pandemic.
How have markets performed over the past quarter?
Over the quarter, we've seen markets exhibit a fair amount of volatility and it's been a quarter of two halves. We saw a gentle start to the year with markets ticking up calmly right up until 20 February 2020. While COVID-19 had been around – reports were coming out of China as far back as November 2019 -- markets had really seen that as a China-centric issue till about mid-February 2020, which was the peak before we saw the sell off.
Key areas of strength or weakness
Markets responded to the developing situation with an indiscriminate sell-off across asset classes and sectors. Energy was the worst performer being hit by both the broad market sell-off and impacts from an oil price crash.
A simmering dispute between Russia and Saudi Arabia, two of the world’s largest oil producers, escalated causing the price of oil3 to collapse from near $60 to $27 a barrel. Though, this would normally have a number of benefits to economic activity, demand has plummeted as industries reliant on oil have ground to a halt, such as travel and aviation, while The Great Lockdown keeps people at home and out of their cars. For the period ending 31 March 2020, the Australian energy sector as a whole fell by almost 50% (48.21%).
On the positive front, the Health Care sector benefited from the situation and gained 1.51%. Unsurprisingly, smaller companies underperformed larger companies, as distressed selling was exacerbated by lower liquidity in these less traded names (ASX 100 -23.01% vs ASX Small Ordinaries -26.72% as at 31 March 2020).
In the US, the tech-heavy Nasdaq index outperformed the S&P 500 by nearly 6% (-19.72% vs -13.95% as at 31 March 2020) as technology companies were deemed to be better placed to remain insulated from the economic challenges.
The RBA stepped in to provide monetary support to the Australian economy, cutting rates twice in March 2020
Months ago, prior to the appreciation of the economic risk posed by COVID-19, the RBA seemed content with holding its policy rate at 0.75%, with the implicit belief that it may have done enough to facilitate economic buoyancy. However, much has changed since then. Over the 3rd March and 18th March meetings, the Reserve Bank Board twice reduced the policy rate by 0.25%, leaving the official rate at an all-time low of 0.25%.
Given the challenges facing our economy it seems unlikely that the cash rate will be lifted any time soon. Whilst Governor Lowe has publicly spoken against the idea of taking the cash rate to zero or beyond, investors can’t entirely rule the possibility out. What is more likely, is that in line with central bank peers globally, it will increasingly move to less conventional policy measures such as quantitative easing.
When can investors expect markets to recover?
Looking at where investment markets go from here and when the recovery may come is not even a million-dollar question anymore. It's really a billion-dollar question.
We know that we need to see the medical crisis fade (and we’re starting to get early indications that this is beginning to happen) and economic growth start to stabilise and recover. There’s been tremendous support by governments around the world in terms of putting fiscal support in place to have the economy healthy enough to reboot once it gets to that stage, possibly over the coming six to nine months.
We'd all like to hope that things are well on the way to being restarted and getting back to a normal rhythm by the end of 2020. Albeit, from the market's point of view, markets broadly, look at 12 to 18 months ahead. The clear conundrum in the short term is the availability of useful information. Whilst we have many fast-moving indicators reacting to the situation, meaningful economic indicators are structurally unlikely to give us truly actionable data for some months to come.
The IMF is projecting that the global economy will “contract sharply by -3% in 2020”, should the pandemic fade in the second half of 2020 and containment efforts can be gradually unwound, they project that the global economy will grow by 5.8% in 2021.4
Note: Whilst the visibility at the moment is low, we don't necessarily need everything to go back to normal to begin to see a recovery in market prices.
The stress in financial markets appears to be generating opportunities for alternative assets
COVID-19 has seen short term activity across private markets grind to a halt, which will delay the pace of realisations previously expected across the portfolios. On the positive side, the stress in financial markets appears to be generating opportunities for managers of alternative assets and we are picking up reports of attractive assets becoming available at similarly attractive valuations.
Advice for investors (including retirees)
We now face a conundrum, where on one hand we face a significant economic shock, even once the virus subsides. On the other hand, global authorities are responding with the largest ever fiscal and monetary stimulus packages. With the immediate outlook unclear and the inevitable emergence of new issues arising from both the medical and economic responses, we are fortunate that history provides some guide to how to navigate the coming months and years. Though the current situation is unique in many ways, the behaviour of markets during periods such as these bear many similarities across time. As the saying goes, “history doesn’t repeat, but it often rhymes”.
It is clear that the coming months will feature many twists and turns, with heightened volatility likely to remain a feature. Just as the isolation measures which we are all currently adhering to are uncomfortable, market volatility is never pleasant. Accepting the discomfort and battening down the hatches, will help preserve mental and emotional energy for making key decisions once the path ahead becomes clearer.
Visit our COVID-19 Insights Hub for economic and market updates to keep you informed as the situation evolves.
2. IMF World Economic Outlook, April 2020
3. As measured by Brent Crude
4. IMF World Economic Outlook, April 2020
Are you worried about market volatility?
If you’re an investor who wants to review the risk in your portfolio, without sacrificing returns, our experienced financial advisers and investment specialists would love to help you. Contact your Perpetual adviser or call us on 1800 631 381 if you’re looking for an expert view on where to invest in 2020 and beyond.