I must confess to numerous weeks now of palpable relief on Saturday mornings when all international markets finally stop trading to allow those of us working in financial advice some respite for the digestion of the week’s events and for reflection on the likely next direction of markets.
This article originally appeared in The Australian on 10 April 2020.
All advisers and investors are racing to understand the depths of the impending COVID-19 recession.
“This is not a normal recession that builds and spreads through time,” said Justin Wolfers, an economist at the University of Michigan.
“Rather, it is a synchronised event, with the government as conductor.”
Recessions generally unfold over a period of months or quarters. This time it has been instant. As a result, the metrics we would typically use to analyse the depth, length and impact of a recession are either out of date, not yet available or practically useless.
In essence, the viral spread must show sustained slowing before the economic impacts of the containment efforts can be definitively assessed.
Equity markets have responded quite properly to this extreme uncertainty, selling off more than 30 per cent before staging a comeback, though we remain more than 20 per cent off recent peaks.
When it comes to shares (the asset class that gets most attention), investors readily understand that they are affected in an amplified way (on the way up and on the way down).
But a brief review of the major sectors in the Australian share index has given me some optimism regarding the capacity of many of our sectors to reach a level of resilience through this crisis and rebound after it.
Financials (26 per cent of the ASX total capitalisation): They are now at historically low price-to-book levels but can be a value trap. Dividends at current levels cannot be guaranteed. We should also consider banks could well become a key arm of the co-ordinated monetary and regulatory recovery from COVID-19, with strong government and their regulatory support.
Materials (19 per cent): A back-in-business China will invigorate demand for raw material companies, which are now more competitively priced than pre-COVID-19, thanks to the fall in the dollar. More domestically focused companies, such as building materials, may suffer from project deferrals or cancellations.
Healthcare (14 per cent): An acutely health-focused community is likely to generate even greater demand for health services, in addition to service increases directly caused by COVID-19 and its aftermath.
Communication and IT services (8 per cent): The widespread working-from-home experience creates a higher and possibly enduring level of demand for networked communications, IT services and support.
Industrials (8 per cent): Industrials are expected to be affected by the slowdown in economic activity but there will be segments of this sector that will be more resilient.
Consumer staples (7 per cent): Stocks in food and grocery companies could continue their resilient performance throughout the COVID-19 shutdown, unless our shopping habits adjust when our pantries are full.
Consumer discretionary (6 per cent): Homewares and fashion will suffer as department and chain stores close and as household formation pauses temporarily, but there will be segments such as home entertainment that defy the sector’s direction.
Real estate (6 per cent): The demise in office and retail demand may spark a re-purposing of real estate to “highest and best” use.
Energy (4 per cent): The decline in corporate use of energy may be partly offset by greater household use during and after the COVID-19 containment phase, though this sector is dominated by oil producers adversely affected by the low oil price.
Utilities (2 per cent): This sector, dominated by energy transmission, is little affected as reduced corporate use of energy may be offset by increased domestic usage.
While many companies in the ASX have withdrawn their earnings guidance, we won’t know the definitive outcome until reporting season begins later in the year. But we are already seeing some interesting transformations in the way business is being conducted over the past four weeks.
One thing that has definitely happened in the past month is everything has accelerated. Speed may well be a residual feature in our new post-COVID-19 world.
Where once we saw business transformation unfolding over years, with COVID-19 as the accelerant, transformations are now unfolding over months.
Nothing will be the same after COVID-19, but I am comforted by the proper working of equity markets throughout this crisis.