The March quarter was marked by market volatility as the world grappled with the challenge of coping with COVID-19.
- The S&P/ASX 200 Accumulation Index fell 23.1% in the March quarter. It was most heavily impacted by the 20.7% fall in the month of March alone.
- The uncertainty associated with the health and economic impacts of COVID-19 led to aggressive market sell-offs as the virus jumped borders and governments reacted with strict measures to curtail the spread.
- The strongest performing sectors during the quarter were those with defensive and essential characteristics - such as Healthcare, Consumer Staples and Utilities. Conversely the Energy, Property and Consumer discretionary sectors dragged the Australian index down.
- WTI Oil plummeted 66.5% to US$21.17/bbl following a breakdown in the relationship between Saudi Arabia and Russia. The ensuing market share grab means there is higher supply at a time when demand is falling.
- Investors sought safety. Bonds rose strongly during the quarter with Australian 10-year yields falling 0.61 basis points (bps) to 0.76% and US 10-year yields fell 125 bps to 0.67%. Relatively speaking, Gold shone, rising marginally +3.9% to US$1577/oz.
Global markets registered their worst quarter since 1987. Nowhere was spared and the pace of the fall had been previously unseen.
Fears around COVID-19 escalated in the second half of February and it quickly became classed as a global pandemic. Government measures to contain the virus escalated as cases grew exponentially.
However, as containment measures such as social distancing, self isolation and lockdowns became more strident, the economic implications worsened. Investors quickly moved to price in a global recession, however the depth and duration were still uncertain.
Central banks and governments have reacted swiftly and in an unprecedented fashion to limit the economic fallout.
The sum of combined monetary policy stimulus and fiscal stimulus announced by government’s (and their central banks) around the world is around $5trillion dollars. As at the end of March, the Australian Government’s fiscal support package totalled ~$200bn or 10% of GDP.
Despite this, economists expect the domestic economy to go into recession, the June quarter to see GDP growth -6% (compared to the same quarter the year before) and unemployment to rise to ~8-9%. Many companies withdrew their earnings guidance in March and have deferred dividend payments.
Outlook and Strategy
The response from governments and central banks has been unprecedented and while at the time of writing the number of COVID-19 cases continues to grow, measures implemented to contain the virus appear to be having a positive mitigating effect in some countries.
The focus for investors now appears to be shifting to the ‘exit plan’ or ‘path to recovery’. While the situation remains very fluid, there are still many risks and uncertainties that we are closely monitoring including COVID-19 case growth, the lasting impacts of a global and local economic recession and potential for recovery, earnings and dividends cuts, continued monetary and fiscal policy support and a more less volatile oil market.
Equity Market valuations have fallen to more attractive levels on a medium to long term basis. While we think prices could fall a little further in the short term, lower interest rates will likely support equity market valuations multiples once the environment stabilises.
However, there appears limited absolute return upside for bonds and we therefore retain our underweight position to bonds in this environment.
While the above macro/market views will clearly have an impact on our Australian equity portfolio construction, we reiterate that our Quality at a Reasonable Price (QuARP) investment philosophy is largely a research driven, bottom up process that emphasises stock selection over thematic investing.
Throughout this period, our focus has remained on companies with strong balance sheets and relatively safe dividends. Presently we are evaluating opportunities to increase our exposure to cyclical or value stocks offering a ‘margin of safety’ or quality businesses at unusually attractive prices.