10 Mar 2020
Special Market Update
By Chris Lioutas - PSK Chief Investment Officer
Yesterday we saw one of the biggest daily falls in asset markets ever, which was triggered by a disagreement between oil majors Saudi Arabia and Russia and exacerbated by growing concerns regarding the impacts of Coronavirus.
Whilst most would have noticed the big drop in equity markets yesterday, more than 7% in ASX 200, and the same in the US market overnight, bigger falls came in other parts of the market, with oil down more than 25% and government 10 year bond yields down more than 40%.
Investors were shocked by firstly the failure of OPEC and the Russians to reach a deal oil production cuts to help lift the oil price, but were then freaked by the Saudis move to instead increase production significantly and then also significantly discount prices on contracts already in the market, effectively declaring a non-combat war on the Russians. The Saudis are in a position to produce oil at any price in the short to medium term, but at current prices will make it almost impossible to finance their budget. The move will financially cripple the Russians and the US shale oil/gas industry almost immediately. A deal is there to be reached to reverse the ridiculous decision made by the Saudis.
Market sentiment wasn’t helped by increased Coronavirus fears, with the Italians locking down the north of Italy with almost a quarter of their population now in quarantine, following a spike in the number of cases and number of deaths. A rather extreme move, but a function of their almost zero action to date and the complacency of their citizens.
But the main concern remains the oil price shock and the potential impact on sub-investment grade debt.
Regardless of a Saudi / OPEC / Russia agreement, yesterday and today’s moves will need to be met by strong fiscal stimulus by governments globally to combat the short-term impacts of Coronavirus, and increased support / confidence from central banks not via rate cuts but rather via increases to lines of liquidity and their overall balance sheets (ie. money printing or QE). Whilst rate cuts won’t necessarily help current sentiment, we are likely to see further rate cuts from central banks from here, with the Fed possibly skirting another emergency rate cut of 0.5%.
What should investors do?
Selling into this panic is the worst mistake you can make, especially so when you consider that the oil price war is likely to be temporary as are the impacts of Coronavirus.
December and January market and economic data, prior to Coronavirus, showed global economic growth was stable and asset prices didn’t appear to be too far above fair value.
Additionally on Coronavirus - the financial and economic impacts of Coronavirus are almost impossible to estimate. Companies have stopped providing earnings guidance, as they should, and we won't know how bad the numbers are until we get them.
BUT, this is a temporary issue that will subside once countries have the right testing and protocols in place and once the northern hemisphere starts to get warmer weather. The flipside is that once it does subside, there will be more monetary and fiscal stimulus in the system than we've ever seen before!!
That means the recovery, once begun, should be rather swift.
From a medical perspective - the following should dispel the significant amount of fake news in the system -
- There has been 114,223 cases since the virus began and a little over 4,000 deaths, with almost 63,000 recovered
- There are 47,000 active cases, of which 87% of people are in a mild condition and 13% in serious or critical
- The number of daily new cases and new deaths in China is declining, whilst the rate for both is escalating outside of China
- The death rates vary country, but the best like for like comparison we have is South Korea - most of the population has been tested, and the death rate is 0.6%, with a sufficiently well supported government response and hospital system
- Fatality rates are as follows:
- 80+ years old 15%
- 70-79 - 8%
- 60-69 - 3.6%
- 50-59% - 1.3%
- 40-49 - 0.4%
- below 40 - 0.2%
- below 9 years old - no fatalities
- Of those aged 50 and over, in almost all cases, deaths have occurred due to pre-existing conditions, including Cardiovascular, Diabetes, Respiratory Disease, Hypertension, Cancer.
- For those aged under 60 years of age, with no pre-existing conditions, the symptoms vary from slightly better than the common flu to slightly worse than the common flu
Putting cash to work is an incredibly difficult call to make once broader market panic has set in, even for those with a long term perspective, but there is no doubting these are excellent opportunities to buy quality long term assets at very good prices.
If you’d like to discuss any of the points raised, please do not hesitate to contact us on 9324 8888.