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Disclaimer: the information and any advice provided in this article has been prepared without taking into account your objectives, financial situation or needs.  Because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to those things.

So, as 2020 draws to a close, we can agree ‘extraordinary’ probably covers it. I am not going to even try to summarise the year. Since the bushfires started about a year ago, we have all had a front row seat. This is in itself an interesting perspective. More often than not, we have the luxury of observing disasters at a distance. They tend to effect people that are either small in number or remote in location. This time around the entirety of humanity has been affected to some extent. The ubiquity of the pandemic is truly unique in our lifetime. You would think this common experience would bring us closer together. We will see.

From the perspective of the pandemic, it appears we are turning the corner. Despite the outlook for the Northern winter remaining grim, progress has been made in developing a vaccine. This ought to draw a line under the pandemic through 2021 and gives policy makers a clearer idea of the magnitude of the economic repair work to be undertaken.

Economies around the world have largely recovered from the depths of the early lockdown recession, but there remains some way to go to achieve pre-COVID levels of economic activity. The trick over the short term, is to transition from economies on ‘life-support’ to self-sustaining activities. This is always the case coming out of an economic downturn. In this event, the policy interventions helped us to avoid outright depression. Thus, the need to tread carefully is crucial. The Great Depression was exacerbated and extended by a series of policies that were too restrictive too soon. This was also the case coming out of the GFC, with the recovery proving slow and feeble.

Policy makers are making all the right noises to err on the side of maintaining fiscal and monetary stimulus. Central bank guidance is for interest rates to remain lower for longer. Budget deficits are ‘cool’ again. However, you will start to hear voices calling for fiscal & monetary restraint. These echo the voices who called for lockdown restrictions to be eased too soon. We’ve seen the result of those calls in the U.S. & Europe. It is analogous to the need to maintain policy support for as long as necessary. As the RBA Governor recently observed ‘creating asset bubbles, is a problem for another day’.

Investment markets have reacted to the policy signals accordingly. For the most part, losses on investments since March have been largely recovered. You may recall in our February update, we talked about a market ‘tipping point’ and the risk the pandemic would upset a market hitherto ‘priced for perfection’. Prescient, no? The recovery in equity markets has in many cases exceeded the lofty levels of February. Does this suggest we are again in risky territory? Maybe, but underlying conditions are clearly different. Globally, businesses are not as healthy as they were back then. While company profits are recovering, they still have a long way to recover previous levels.

Nevertheless, with interest rates locked down at virtually nothing for some years to come, the investment options are binary. You can invest safely and earn nothing in real terms, or move ‘up the risk curve’, earning at least something, but needing to endure the volatility endemic in ‘growth’ assets. We would lean to the latter. Volatility is uncomfortable but if you can be relatively certain an investment will recover value and grow over the long term, ‘risk’ takes on a different perspective.

The need to diversify to manage risk has never been more important. While companies that were able to adapt to lockdown dominated most of 2020, we are already seeing markets turn their gaze to what happens next. This is behind the recent rotation from ‘growth’ companies to ‘cyclicals’. A different perspective for a different part of the cycle.

We are relatively positive on the outlook for markets in 2021. We expect the Australian share market to out-perform global markets, as they are generally starting from more conservative valuations. There will be failures along the way. As the tide of economic support starts to recede, companies crippled by the events of the past year (known in the vernacular as zombies), will be exposed.

We expect defensive assets to provide meagre returns. They are still required in a portfolio for capital preservation purposes, but, if we are over the worst of the economic downturn, interest rate markets will be locked hard against the upper limits central banks have imposed.

We also expect to see a significant rise in the number of products offering investors yields that appear too good to be true – AKA scams.

If you take nothing else from this note, know this; returns are always and everywhere a reflection of risk. It is not always obvious where the risk lies, and indeed it is not always the case that the risk results in failure. Sometimes you bet on red and red comes up. If you are offered a ‘safe’ high yielding investment, approach with scepticism (or not at all).

Thank you to all who have provided feedback on our various communications over the year. Thank you also to all of you who have put your faith in our ability to steer you through such conditions. We take our responsibilities to you seriously and consider your success, our success.

Best wishes for the season and a peaceful 2021.

Information current as at 8 December 2020.

This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This article may contain material provided by third parties derived from sources believed to be accurate at its issue date.

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Disclaimer: the information and any advice provided in this article has been prepared without taking into account your objectives, financial situation or needs.  Because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to those things.

The U S share market closes, this morning at levels past seen on Christmas eve 2018. As at the close yesterday, the Australian share market was back at levels last seen in 2016. The speed of the fall in share prices has been nothing short of epic. This has no doubt been enhanced by the ability of investors to buy or sell at the push of a button. We have no short-term idea about where this goes or how long it persists. Current conditions are not consistent with the various ‘corrections’ we have seen over the past 10 years. When we talk to you about risk profiles, this is the 1 in 20 year event to which we are alluding.

Confidence has been decimated by the inability of financial markets to price the global health emergency we are experiencing. Until some clarity arises in this regard, markets will react to the short term news-cycle. If you have never experienced this before, this is what a ‘bear market’ looks like.

It seems apparent to anyone you ask that recession, however defined, is likely. By definition a recession is a contraction in economic growth. The reduced activity you see every day (expect perhaps in the supermarket), is an obvious example. As businesses close down to manage the health risks, this is also a contraction of economic activity. The positive feedback loop the conditions create send these contractionary impulses through the economy. The figures proving a contraction are generally not published until months after the end of the quarter, but that ‘vibe’ you are feeling; that is the feeling of economic contraction.

The effects of a recession are not evenly dispersed. Some will feel it more keenly than others. Those whose job is at risk or were otherwise generally at risk will feel it the most.

Markets are trying to establish the extent of this contraction and how that looks in terms of the effect on company earnings. This is how markets price an asset – the current value of future cashflows. Current market conditions are suggesting a severe and extended effect on earnings, thus, they are discounting heavily. The real risk is where companies do not have sufficient balance sheet strength to see it through. Like in 2008/09, strong companies will be bruised, but not beaten. Weaker companies will not survive.

Our ‘average’ client has about 50% of their investments in equity type assets; risk assets, as we call them. Some have more, some have less. Thus, the effects on your portfolio will reflect this weighting. By and large the defensive assets, those that were generating modest interest income and little or no growth, are doing the primary job for which they are intended; capital stability. In normal times it is easy to dismiss this part of your portfolio as ‘lazy money’. Well, it is working hard now.

In these conditions, it is completely rational to be concerned. We are also concerned, but perhaps for different reasons. Our biggest fear, in this environment is that the pressure gets too much for you and you decide to ‘bail out’ of growth assets. It is like you just want that gnawing feeling to stop. We feel it too. However, as I look at your portfolios, and the assets you own, I start to feel better. There are investments which are losing value with markets but within these are good companies with strong balance sheets, and strong businesses. The very act of diversification means that even if a company in an investment fund fails, it is not catastrophic.

When reviewing portfolios we consider if an investment still serves the purpose it was originally intended. Even given current conditions, if we were starting from here, this would be the place to start. Clearly, we are all generally not starting from here. In the short term we see our investments have lost value. However, you still own these assets. They remain, in our opinion, quality assets. I don’t want to give them away cheaply.

If we take away the emotion (easier said than done, I know), long term return expectations are the highest they have been in many years. Assuming investment returns regress to long term averages, the expected annual return for Australian shares in in excess of 11% p.a*. Global shares are a little less than this. As always there are no guarantees these projections never travel in a straight line. However, if we are looking at the cold hard numbers, it is hard to justify selling these types of assets at this time. Indeed, it suggests adding to growth assets would be the logical outcome. In the current environment, this is a big ask. However, as the medical emergency wanes, markets will, at some point look at the lowest interest rates ever, the lowest asset prices in many years, an end to the recession and the long-term prospects of companies that have survived the recession.

We have every confidence that if you can weather current conditions, your portfolio will recover and prosper in the long run. We believe the investment assets you own are sufficiently diversified and well managed to come through these conditions in good shape.

We are hearing anecdotal evidence that super fund members without advisors are ‘cashing out’ and then phoning the call centre for affirmation they have done the right thing. They haven’t, but they won’t know it for some time. You have us. This is what we are here for. If in doubt, call us. We are with you through this in every sense.

(*assumes long term average for market dividends, growth in earnings and relative valuation – PE. I can take you through these assumptions in detail if needed).

Information current as at 17 March 2020.

This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This article may contain material provided by third parties derived from sources believed to be accurate at its issue date.

Last week I attended a conference, where a range of presenters from different parts of the globe provided their view on a range of topics focusing on markets and economies. Not surprisingly, a significant part was in respect of the potential impact of the COVID-19 outbreak. As you can imagine, this was a fluid discussion, but it spanned a range of opinions and prognoses. These ranged from this being the ‘Black Swan’ event for economies and markets, to a more prevalent ‘this too shall pass’ analysis.

Both are probably right; it is a matter of degrees and timing, that are the only real points of contention. However, these points of contention are what really matter.

The pessimist case argues that the world of economies and markets are severely underestimating the potential impact. Recent news is tending to support this argument. While the rate of infection at the epicentre appears to be falling, there is growing evidence that the breadth of infection is more widely dispersed than first indicated. I don’t know a lot about the biology of viruses, but I do know a bit about numbers. The fact that cases are arising in parts of the world not previously thought at risk indicates the attempts at containment by quarantine is probably a failure. If the incubation period is longer than previously anticipated, it is ‘out’. The exponential rate of growth is likely to see the virus cross multiple geographic locations (the definition of Pandemic).

From an economic perspective, the short-term damage is already being done. Clearly, anything related to tourism & travel is being affected. However, as ‘the world’s factory’ (Hubei Province) has effectively been shut down, the trickle-down impact on other industries is yet to be fully appreciated. Moreover, as the spread continues and more countries implement quarantine procedures, this can only increase. Comparisons with the SARS virus of 2003 are less useful from and economic perspective as China was a relatively modest component of world trade at that time, only ascending to WTO membership in 2001.

No matter what direction the virus takes from here, you will begin to see more and more companies downgrading earnings and economists downgrading growth. One of the less tangible aspects of this is ‘confidence’. This can be a self-fulfilling prophecy. Strength in economic growth and investment markets, has been, in the recent past, an outcome of greater confidence, as various concerns are overcome i.e. Brexit and Presidential impeachments. A ‘Black Swan’ event, by its very nature (low probability, high impact), can erode confidence quickly. In recent weeks, we have seen equity markets overcome concerns and make new record highs. This dichotomy suggests markets are either under-appreciating the significance of the virus or looking through it. This is the essence of the range of opinions presented at the conference.

In suggesting they are both right, we believe an accumulation of bad news will see equity markets reach a ‘tipping point’. Thus, the odds of s significant market correction are relatively high. We know uncertainty is anathema for equity markets. We know valuations in certain parts of the world equity markets are high. It is easy to draw a metaphor with the recent bushfires, high fuel loads, an unfortunate spark etc.

The other side of the argument is equally plausible. Economic growth will be interrupted, but once the virus has passed, there is the potential for a significant period of economic ‘catch up’. That is, demand is being delayed, rather than destroyed. It is also clear that monetary authorities are awake to the economic impact. Chinese authorities are already increasing liquidity and cutting interest rates. It is now almost certain the RBA will also cut rates further, to support short term demand. One can assume monetary authorities around the world will again do ‘whatever it takes’ (the metaphorical rain that douses the fires).

For investors, this can present a conundrum. Do you ‘take cover’ and wait out the storm or do you ‘ride it out’? in deciding to ‘take cover’ this will be the first of two decision you need to make; when to sell and when to buy back. You will almost certainly get the timing of this wrong. To ‘ride it out’ requires some measure of faith but is the rational approach.

When the virus passes, and after authorities have continued to provide economic stimulus, levels of liquidity will be higher than they have been for some years. As we have seen, this money needs to go somewhere and ‘safe’ investments such as cash & bonds generate precious little return. Therefore, a rebound in markets may be sudden & swift.

If your timeframe is measured in months, taking cover may be the right approach. If it is measured in years, it is probably a mistake.

Over the coming weeks/months, you need to prepare for increased market volatility. We understand these events will create anxiety. However, we are confident ‘this too shall pass’.

Information current as at 23 February 2020.

This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This article may contain material provided by third parties derived from sources believed to be accurate at its issue date.

Feedback from clients and staff highlights the trust and respect Jess has and how she just has a knack for putting clients at ease. Congratulations and well-done Jess.

This time last year, equity markets were reaching the nadir of significant correction, with major global share markets falling by double digit sums. At various times in 2019, equity markets looked wobbly. However, markets have generally risen and in a number of cases, made record highs.

On a ‘look through’ basis, we can broadly say it was a successful year for investors. While returns across asset classes varied, they have generally been positive and in many cases, more so than we would have expected.

The major themes of 2019 have been trade wars, recession and interest rates. They are all interrelated. Free trade has been the most significant driver of global economic growth for the past ~30 years. The apparent retreat from this trend has, not surprisingly, created doubt about the future strength of the global economy. Economies have slowed, but whether this is entirely due to trade tensions, or a more generalised ‘mid-cycle slowdown’ is debateable.

GDP is essentially a measure of spending; GDP = Consumption + Investment + Government + Net Exports. Recent data in Australia suggests the latter categories are the only areas of growth. Indeed, growth tends to rotate through these categories over time. This is how we have avoided recession for 28 years. A low volatility economy will generally have both lower peaks and shallower troughs.

Our view is that the economic conditions we are currently experiencing are to be expected and ephemeral. It would help if the Government was not obsessed with a budget surplus. The recycling of old fears for our cherished AAA rating is puerile. The Government has never been able to borrow more cheaply. Nonetheless, we believe the global economy is probably past its worst and will start to rebound next year. This will help us to remain ‘the lucky country’ for a little longer.

Lower global interest rates and less conviction about a global recession, has helped propel equity markets. The lower rates go the more desperate the hunt for yield. There is of course the little issue of risk; an issue we see being increasingly ignored.

Into the void comes the ‘structured product’. On the surface these look like the answer to the yield seekers prayers. I direct your attention to exhibit A; the KKR income fund (KKC). The Initial Public Offering (IPO) for this listed trust was oversubscribed by a factor of 4. It indicated a target return of 6% – 8% p.a. with a target income distribution of 4% – 6% p.a. Attractive right? What is not as clear is that the underlying investments are what is euphemistically termed ‘high yield’ credit AKA junk bonds. This is but one example of new products being created to attract the unwary and imprudent. You need to ‘look under the bonnet’ and see what Is driving the vehicle.

Enough of the abject cynicism! We believe 2020 will be positive for investors. Returns are likely to be lower than this year, as the outsized returns arising from falling interest rates will be absent. Increased economic confidence may nonetheless buoy company earnings and generate higher equity prices. We prefer non-U.S. equities on a valuation basis, but U.S. markets generally do OK in an election year. Whether the clown show in Washington is drawing to an end is another matter. The intolerance of low interest rates will see market corrections quickly rebound as FOMO & FONGO[1]. Thus, expect significant market volatility. Have a Great 2020, anyway.

[1] Fear of Missing Out & Fear of Not Getting Out

Information current as at 5 December 2019.

This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This article may contain material provided by third parties derived from sources believed to be accurate at its issue date.