Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 353

Welcome to Firstlinks Edition 353

  •   16 April 2020
  • 2

The Great Lockdown will be the worst downturn since the Great Depression, says the International Monetary Fund. It warned last week that the Australian economy will slump by 6.7% in 2020, followed by a recovery in 2021. While the economy is not the stock market, there's a disconnection at the moment. The S&P500 index in the US has risen in each of the last two weeks, while 22 million Americans lost their jobs in a month. Despite the poor outlook, price/earnings ratios in both the S&P/ASX200 and the S&P500 are still above long-term averages.

The latest NAB Business Confidence survey shows what companies are facing:

"Business confidence saw its largest decline on record and is now at its weakest level in the history of the NAB business survey ... Business conditions also declined sharply in aggregate and across the bulk of industries ... Forward orders collapsed to their lowest level on record, while capacity utilisation also saw a sharp decline. Overall, the decline in forward orders and business conditions imply a large fall in GDP in the next 6 months."

Likewise, in March 2020, the Westpac-Melbourne Institute Index of Consumer Sentiment fell by the single biggest monthly decline in the 47-year history of the survey.

It's a pivotal week for global stock analysts as the US March quarter company earnings reports are released. If March is bad, June will be worse when the full impact of coronavirus will be felt. Expect reluctance from companies to provide 'earnings guidance'.

The variance in optimism and interpretation of turning points is creating the market's volatility. In only five days, battered stocks like Afterpay rose 45%, Corporate Travel 52% and Flight Centre 35%. In the US, casino operator, Wynn Resorts, was forced to close in Las Vegas and Boston. Its shares initially fell 75% from $140 to $35 at the peak of the panic, then rose 140% to $84 before falling again to $46. The market has no idea how to value it.

In Australia, it has been disappointing to see the discounts on Listed Investment Companies (LICs) and Listed Investment Trusts (LITs) widen even further from their net asset backing, especially the smaller vehicles. As if it is not bad enough that asset values have fallen 50% in some cases, but investors face a further hit if they want to sell, as shown below.

Premium and Discounts to NTA for LICs and LITs by market value

As Bell Potter reports in its weekly update, the giant $1.3 billion LIC raising by L1 Long Short Fund in 2018 at $2 a share, trading last week at $1 after a low of $0.66, still cannot find any friends. The fall in NTA is worsened by a discount of about 30% (as at 7 April). Its IPO was launched with minimum raise of only $100 million, but they could not resist the stampede of money.

The worst-performing funds in any heavy sell-off are geared funds, as this article warned in January 2020: "Duh! Of course geared funds won, but know the risks". Now the article would be, "Duh! Of course geared funds lost". These funds are a good way to leverage into a rising market, but are not for the faint-hearted, as shown below for the month of March (source Morningstar Direct):

This table also shows many property trusts have collapsed, victims of a lockup nobody expected. How many people thought property was a defensive asset?

In this week's edition ...

Many readers are struggling to understand how governments are financing the trillions of stimulus spending. As one commented on our website:

"On this logic, if the stimulus was $500 trillion, it shouldn't matter. If my understanding is correct (hope not) we can solve world poverty in a moment."

We reached out to a global authority on debt financing and this 'monetarism magic', Professor Tim Congdon, and he provided an exclusive explanation in the simplest terms possible. In summary, when more dollars chase a smaller pool of goods and services, the result (eventually) will be inflation. That is the future cost, but not now, because the economy is weak with plenty of spare capacity and unemployment.

Back in the real world, Jun Bei Liu summarises the current dilemma facing all fund managers, mixing the poor near-term economic outlook with tempting buying levels for favoured companies.

Our Reader Survey on the impact of coronavirus produced some surprising results, with only 17% of the 700+ respondents saying we have seen the bottom of the market. The full report includes fascinating comments on how people are reacting.

Hasan Tevfik detects a fundamental change in stakeholder obligations for most companies, with profound earnings implications, but it cannot last in the long term.

David Bell explains how much taking $20,000 from super now will cost in retirement, while Ramani Venkatramani examines more options for super changes that the government might consider. Still on super, Julie Steed warns that the expected age-based changes for contributions are not legislated and may miss the 30 June deadline.

Bruce Gregor is a demographer, and he offers insights into Australia's coronavirus death statistics, and examines the health implications of a return-to-work.

Finally, a change of pace as lawyer Donal Griffin says his happiest clients are those who have escaped a near-death experience, and we should rethink how we approach life post the virus.

The BetaShares March 2020 ETF Report shows trading values reached an all-time high of $18 billion for the month, or 2.5x the previous monthly record of $7 billion recorded in February.

This week's White Paper from Neuberger Berman goes inside their asset allocation committee to see how coronavirus is changing the investing of one of the world's largest fund managers.

Graham Hand, Managing Editor

Latest updates

Australian ETF Review from BetaShares

ASX Listed Bond and Hybrid rate sheet from NAB/nabtrade

Monthly market update on listed bonds and hybrids from ASX

Indicative Listed Investment Company (LIC) NTA Report from Bell Potter

Monthly Investment Products update from ASX

PDF version of Firstlinks Newsletter

Plus updates and announcements on the Sponsor Noticeboard on our website



Most viewed in recent weeks

Buffett's meeting takeaway: extreme caution

Warren Buffett's annual meeting of Berkshire Hathaway showed he has not been 'investing while others are fearful' during the crisis. lt's a reminder to take caution and preserve cash.

Welcome to Firstlinks Edition 356

Few investors are as influential as Warren Buffett, although for the moment, the market is ignoring his caution. The annual meeting of Berkshire Hathaway revealed Buffett did not use the heavy market falls in February to buy shares. Rather than 'buy when others are fearful', he was a net seller of US$6 billion for the quarter, disposing of all airline shares. Berkshire is sitting on US$137 billion in cash, suggesting he expects better buying opportunities to come.

  • 7 May 2020

The vibe of future returns: tell ‘em they’re dreamin’

It's the vibe, but not much else. Super balance calculations default to earnings rates of 7.5%, but that's in the past. Global experts suggest financial plans are now dreaming at this level.

Baseline outlook for economic recovery is too optimistic

We cannot throw our hands up in the air and say 'this time around, it's simply too hard'. Having no macro view is unhelpful, but many of the baseline scenarios are overly optimistic, says the former CEO of Westpac and now Chairman of Chi-X Australia.

Retiree spending patterns differ from most expectations

A study of actual spending habits shows retirees have a faster-than-expected drop-off in spending in later years, casting doubts on financial plans that assume increasing expenditure over time.

Welcome to Firstlinks Edition 357

There is a remarkable concentration similarity between the Australian and US stock markets that has delivered poor results for Australians and great results for Americans (and global investors). As the share prices of five Australian banks have tanked, the prices of five US technology companies have surged. Each group now represents 20% of their respective indexes, but the journey has been a disaster for many Australians.

  • 13 May 2020

Latest Updates


Baseline outlook for economic recovery is too optimistic

We cannot throw our hands up in the air and say 'this time around, it's simply too hard'. Having no macro view is unhelpful, but many of the baseline scenarios are overly optimistic, says the former CEO of Westpac and now Chairman of Chi-X Australia.


Will our government embrace these three reforms?

COVID-19 is an opportunity for a crucial policy reset, but what does that really mean? Business is hoping for three big reforms, but there are massive barriers to be overcome.


8 reasons business has little to learn from 'The Last Dance'

Everyone seems to be watching The Last Dance, a fascinating sports documentary about the pursuit of excellence by one of the greatest athletes of all time. Let's not stretch the business analogy too far.


Do long-term investors need to care about the ‘next big thing’?

When we look back five years from now, which companies will we regret not having bought at today’s prices? The next opportunities come from focusing on the long term, not the next few months.


Not all non-residential real estate performs the same

Retail assets, particularly those focused on discretionary shopping, will continue to underperform and industrial and logistics assets will be the winners for the foreseeable future.


The uncertainties of using debt in a time of crisis

The ability of countries to support their economies today turns on fiscal practices set well before this crisis. Increasing levels of debt escalate overall risk, and tie our hands in the future.


Do you qualify for this help in the crisis?

It will surprise many that benefits worth over $8,700 could be available for a couple with a super balance over $4 million. Check if you are eligible for the Commonwealth Seniors Health Card.


What SMSF trustees need to know about benefit payments now

The government has announced initiatives to help people use their superannuation in response to the crisis, but for early access and drawdown changes, there are important rules to follow.



© 2020 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.