Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 359

Welcome to Firstlinks Edition 359

  •   27 May 2020
  • 5

Quick weekend update on last week. US shares were flat on Friday but gained a healthy 3% for the week. Australia sold off on the final day but still rose 4.7% for the week with strong gains from banks. Amazingly, since the 23 March lows, global shares have risen 32% and Australia is catching up at 29%.

All in a week when US jobless claims topped 40 million and millions more gave up looking for work.


We recently sold the family home we have lived in since 1989 for a high multiple of the original purchase price. Does that make us good investors? No. Did we pick a particularly fine house? No. The prices say more about our age than our skill. It simply means we live in Sydney and we allowed the investment to grow over a long time without selling any part of it, like millions of other Australian home owners.

Investors who treat equities the same way will be better off than those who try to time the market. What if we had sold our house in 1992 when it had fallen in value during the last recession? It's the day-to-day revaluing, worrying about markets and moments of panic which compromise the compounding potential of simply holding an equity portfolio for decades. Our lead story this week looks at the amazing numbers.

At the moment, the stock market is reacting to each piece of news on COVID-19 while other long-term problems are pushed into the background. The most serious risk is the heightened trade tensions with China, which buys one-third of all Australia's exports. This is more important than whether another person dies in a nursing home or the US hits 100,000 deaths.

On first look, our dependence on China looks like a threat and a need to diversify. However, the issue is far more complex, as China also needs Australia, as shown below. 

Source: IHS, Macquarie Commodities Strategy, May 2020

China buys two-thirds of its iron ore and almost half its metallurgical coal and LNG from Australia. With Brazil hard hit by COVID-19, facing more daily deaths than any other country, where else will iron ore come from for a long time? A bigger threat comes from the tension with the US and its impact on global growth, especially when one person will do all he can to use China as a political weapon until the November election.

So where are we on the investment cycle chart? Here's one version by Canadian scholar, Jean-Paul Rodrigue, who shot to fame in the GFC with his 'four phases of a bubble' model, as shown below. He argues the stock market works by some smart investors picking the initial 'stealth phase' (is that happening now?), and then institutions join the buying. The media write articles about how much money others are making, FOMO kicks in and the general public drive a 'mania phase'. At some point of greed and delusion, there is a 'blow off'.

Put your own arrow on where you think we are at the moment, it's as valid an opinion as anyone's. Are we near the point labelled 'return to normal'?

That's the problem with investing, there are few absolutes. Outcomes depend on human behaviour, it's not physics or chemistry. Our first article goes back to basics with a mathematical certainty everyone can play with. There's more investing learning in a simple formula than any other lesson.

Also in this week's edition ...

Two high-profile fund managers who have run portfolios for many decades update their latest views. Paul Moore is a value investor who saw his style returning to popularity before COVID-19 blasted the focus back to growth companies. Then Roger Montgomery explains why the market has run so strongly in the face of economic headwinds, but there are limits to whether it can test the previous highs.

Many investors feel they have missed the rally, so Emma Rapaport delves into the Morningstar database to find 10 companies rated 4 or 5 stars but with a more predictable earnings outlook than most. 

As investors look to alternatives, Jordan Eliseo fielded questions from SMSF trustees on gold and where it might sit in a portfolio, while Leonie di Lorenzo says HNW investors are moving from cash to fixed interest, tailored investments and foreign currencies. 

On COVID-19, Francis Scotland argues time in lockdown is a major risk, and lessons from the past argue for a return to business activity, while David Bell describes intriguing work by two young actuaries, Calise Liu and Alan Xian, who have mapped Australia for regions vulnerable to a virus outbreak.

Finally, the long-running saga on conflicted remuneration for LICs and LITs has been addressed, but commissions can still be paid on other listed issues, which is a disappointing outcome for Jonathan Rochford.

This week's White Paper from AMP Capital switches focus from the short-term impact of COVID-19 to examine 10 longer-term implications.

Graham Hand, Managing Editor


Latest updates

PDF version of Firstlinks Newsletter

ASX Listed Bond and Hybrid rate sheet from NAB/nabtrade

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

LIC Monthly Report from Morningstar

Latest LIC Quarterly Report from Bell Potter

Plus updates and announcements on the Sponsor Noticeboard on our website



Most viewed in recent weeks

Easy money: download Robinhood, buy stonks, bro down

Millions of inexperienced traders have entered global equity markets since the end of March, fuelled by hype in a rapidly-rising market. What is happening and how are they having an impact?

Warren Buffett's letter about new investors and speculation

A pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons: speculation is most dangerous when it looks easiest.

10 reasons to sell your dud stocks for EOFY

Anyone with capital gains from property or shares should take this EOFY opportunity to find offsetting capital losses. There are many benefits from cleaning out the portfolio stuff-ups.

How much bigger can the virus bubble get?

Stocks have rallied hard creating a virus bubble, but will this run for years or collapse in a matter of months? The market is giving a second chance to leave so head for the exit before there's a rush.

Share trading is the new addiction

The ability to buy and sell cheaply and quickly in small parcels is both the biggest drawback and benefit of shares. But it encourages people who should not go near the market to use it as a casino.

The populations of key countries are shrinking

Population decline is a new, yet largely ignored, trend with underrated economic and social costs. Much of the growth that drives economies, especially in Australia, comes from population increases.

Latest Updates

Howard Marks' anatomy of an unexpected rally

Markets can swing quickly from optimism to pessimism, and while there are more positives now than in the bleak early days in March, the market is ignoring many negatives. Risk is not rewarded at these levels.  

Why are we convinced 'this time it's different'?

Investors tend to overstate the impact on investments when something significant happens and they assume the future will be different. COVID-19 has been dramatic, but is it really that unusual?   


Super fund performance and rank depends on risk

APRA's heatmap has profound implications as it shows which super funds are underperforming in a period. But when good markets are compared with poor markets, one in five of funds changes its assessment.    

Investment strategies

Why women are most hurt by financial pandemic

Many people were financially unprepared for a pandemic, but it is women who are suffering most because they earn less, have interrupted careers and have less risk-taking capacity.


What is happening with SMSFs? Part 2

The latest SMSF data shows retirees favour listed shares and cash to maintain liquidity. SMSFs continue to grow, and the new super rules led to changes in contributions, payments and lump sums.


Retirement dreams face virus setback

A new survey of over 1,000 people near or in retirement found three in four are not confident how long their money will last. Only 18% felt their money was safe during a strong economic downturn.


Common confusions with death benefit pensions

Awareness of common misunderstandings in relation to the payment of death benefit pensions can assist in estate planning matters. Given the large amounts involved, seeking professional advice helps.



© 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.