Where To From Here

April 18, 2020

Fellow Investors,

 

We had our quarterly webinar this week, if you missed it there is a link below where you can watch it.  

 

This week we saw the equity market rapidly pulling back losses from prior weeks, there doesn't seem to be much recognition of the longer-term economic impacts of the current lockdown.  The government stimulus needs to be paid for either through monetary or fiscal responses or a combination of both.  We explain some of our concerns on these issues below.

 

Even amongst the doom and gloom, I think that this is a good time to looking for investments.  We are optimistic about the opportunities and prices of some companies in the market, but we can't help but feel that this is a relief rally and that there will be business failures and wider impacts that will affect listed companies.  The trick becomes avoiding the ones where there is the potential for earnings downgrades while at the same time not paying too much for those not impacted.

 

China’s First-Quarter GDP has Fallen 6.8%

 

China’s economy contracted by 6.8% in the first three months of 2020 compared with a year earlier.  This is the first contraction since Beijing began reporting quarterly gross domestic product in 1992.  We are expecting the total impact of Covid-19 on the Australian economy to be closer to 10%.  This will have a significant impact on Australian resource companies and commodity prices.  We experienced something similar post-GFC and it was a few years before the resources companies began to perform again.

 

 

 

Stagflation
 

Stagflation is the combination of slow, stagnating economic growth, high unemployment, and high inflation. This situation is a very real possibility for Australia as the government has announced an increase in the supply of money, a situation that creates inflation.  It will be a statistic worth watching over the following months.  In normal conditions, slow growth stops inflation.  In the current situation, government policy has increased the supply of money, causing inflation.

 

There is a very real possibility that we enter into a period of stagflation. The chart below shows the conditions required for that situation.

 

 

 

The RBA is expanding Australia's money supply, implementing quantitative easing for the first time ever
 

Without getting too technical here, the RBA is printing money.  Increasing the amount of money in the private sector.  This leads to inflation.

 

Very soon we will have high unemployment which will grow as businesses fail.  Corporate earnings will decline.  Nearly every sector in the economy will feel the impact.

 

This is part of our thinking as to why there won't be a v-shaped recovery.  It will take time for corporate earnings to get back to pre-coronavirus levels.  The government has very little room left to reduce interest rates and many small business are taking on additional debt and running down their cash levels.  That situation will in itself become a problem.  Australia has a disproportionately high level of small business ownership.  Small businesses account for 35% of Australia's gross domestic profit and employ 44% of Australia's workforce.  Their failure will impact larger listed companies.

 

In this market active stock picking is key.
 
Watch our quarterly webinar


If you missed listening to our quarterly investor webinar this week you can watch a recording of it by clicking on the image below or here.....

 

 

 

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