The ETF Securities Partner Series joins with Australian and international investment professionals to discuss the big issues of the day and what these mean for investors.
COVID-19 has dominated headlines for months and is influencing rapid change in the way we live and work. Change at any time can be unsettling, but combined with a serious health threat, it can drive anxiety and concern not just on a social level, but also in financial terms.
ETF Securities spoke to Jon Reilly CIMA, Chief Investment Officer for Implemented Portfolios and Adam Dawes, Senior Investment Adviser for Shaw and Partners on the topic ‘Where are we now? Where are we going?’.
The state of the nation for financial markets
“We’re in the middle of a deliberate demand shock. We’ve chosen for very good reasons to shut down our economies, and it’s going to be a hugely dislocated, disruptive event, we know that.” Says Mr Reilly.
While markets rebounded slightly this week on the news of positive manufacturing numbers in March from China, it’s fair to assume the volatility is not over and recovery may be some time away.
“It’s been a very stressful time for all of us in the financial markets and certainly, going forward, I think it’s not going to get any easier,” says Mr Dawes.
If we look at China as an example across the peak of the crisis, the economic data was worse than many analysts had anticipated. Across January and February 2020, Chinese industrial production fell 13.5%, service production fell 13%, retail sales fell 23% and exports fell 17% . Even assuming China is able to move back into full scale production rapidly, it is trying to recover in a world where other countries are moving into full scale lockdown and we are yet to see what the lockdown has meant in terms of income shock to individuals and businesses alike in China .
Alongside China, US markets continue to dominate the global economy so consideration of their ability to recover also needs to be factored. There are questions about its ability to contain the pandemic or whether economic and political measures from the government and the Federal Reserve will offer enough of a buffer to prevent a recession. In the wake of the US death toll now exceeding official Chinese numbers, US President Trump is anticipated to release a fourth wave of stimulus focusing on infrastructure (a policy from his 2016 campaign) .
Australia has taken a number of measures to manage the current situation. The Reserve Bank of Australia reduced the official cash rate to 0.25% and announced a program of quantitative easing – a significant announcement given it was not a measure used even in the heights of the Global Financial Crisis . The Federal Government has also announced a number of stimulus measures to support businesses and individuals – with some predicting more announcements to come .
Uncertainty plays into investor psychology and it’s been hard to find pockets of safety in the volatility.
“There was nowhere to hide, whether it was Aussie equities versus international equities. Bonds got sold off significantly as well. That was disconcerting for people in the early days. It’s been pleasing to see some sense of order returning to those markets” says Mr Reilly.
A greater market correction than expected
While no one could have anticipated the COVID-19 pandemic and the influence it would have on market volatility, both Mr Reilly and Mr Dawes suggest that a market correction (to an extent) had been overdue anyway.
“I certainly feel that markets were overvalued… we had some conception that markets were a little bit toppy” says Mr Dawes.
Mr Dawes has found specific assets and sectors have offered defensive positioning.
“Consumer staples has been a fantastic spot. We were overweight in that sector and we didn’t do a lot of selling of Coles, in fact, we added to it even if clients did have Woolworths in their portfolio. Two years ago, we put 5% of gold in everybody’s portfolio and … it has held up really, really well for us”, says Mr Dawes.
In this environment, it has been valuable to focus on fundamental beliefs and research for investments.
“When we look at what we put into a client’s portfolio and what we don’t, we look at how much income will they get, how quickly are earnings going to grow, and what’s the valuation price? What’s someone going to pay for your investment in the future?” says Mr Reilly.
Where are we going?
Both suggest there may be opportunities from the current environment but caution that a slow and steady approach is beneficial to managing potential ongoing volatility.
“We’ve made a first step in to buy a little bit more Aussie equities, a little bit more A-REITs. We’re still taking a long-term view. We think there’s absolutely some generational buying opportunities here” says Mr Reilly.
Mr Dawes adds, “You don't need to be a hero, you just need to buy quality and good quality companies with good balance sheets and just absolute quality, top 50, top 100, top 200. Even if you wanted to go with some of the ETFs, ZYAU is a very good one also because it provides a good dividend.”
ETFs across the COVID-19 pandemic
As with the rest of the market, ETFs have not been immune to the volatility, particularly bond ETFs, but they continue to offer a responsive way for people to adapt to these changing markets.
“ETFs, as a whole, have really made this market today what it is. The ability now for me to go into gold, to go into the US, to go into far-reaching parts of the world on the ASX and be able to buy that and be able to put a portfolio together. The diversification that I’ve got in my clients’ portfolios now is far greater than it was 10 years ago,” says Mr Dawes.
ETFs traditionally offer a cost-effective way to instantly deliver broad, diversified exposure. This characteristic may be useful in the current market volatility to allow investor to tilt in favour of defensive or growth investments. Mr Reilly suggests this, along with liquidity, may even drive new converts to ETFs after this crisis. Even so, investors should refer to the basics of investing and the fundamentals of the companies, sectors and countries they want to invest in.
“ETFs are a wonderful portfolio tool, but it doesn't preclude you from doing the work to understand what you own in this very convenient wrapper of an ETF structure.” says Mr Reilly.