March 2020 Market Update

We have no doubt that our members are concerned about the Coronavirus (COVID-19) and its impacts on our society and economy. The Christian Super investment team have supplied the following market commentary to help explain what is happening and what we might expect to see in the coming weeks and months.

Markets are dominated by concerns over the effects of COVID-19.   It is difficult for anyone to fully comprehend the sheer weight of information and the speed of short-term developments let alone the medium to long term effects.

Decline and recovery

In all such situations, stock markets are very good at over-reacting, bouncing back, and then forming a more stable ongoing consensus.  Similar systemic scares like SARS in 2003, and 9/11 in 2001 showed significant bounce-backs in market recoveries, based on assessments of a new reality that takes several weeks to emerge.

In the first fortnight after virus cases outside China exceeded those within China, global stock markets declined by 20%.

However, it must also be said that before COVID-19 concerns, investment markets already looked too expensive on most measures.  Therefore, while COVID-19 will have an effect on global productivity, the sharp market response could be also include a response to pre-existing market sentiment.

Fundamentally, while economies showed mildly positive signs at the start of 2020, the bushfires in Australia and the introduction of a severe disruption to the global economy has changed the outlook for 2020 altogether.  In a few short weeks whatever we thought the year would bring on New Year’s Eve has now changed to a very different trajectory.

What do we know?

Market reactions have been swift and uncertainty remains high about the true effects on earnings and economic indicators.  This means we expect market volatility to persist and expect that this volatility will provide some buying opportunities.

This is because we are seeing swift and wide-spread responses from several governments both in terms of containment and limiting the human effects of the virus and in fiscal stimulus packages to disrupted economies.  While not at all ideal, it does suggest that policy makers are alert and responsive and that ultimately things will improve.

Sector shifts within stock markets indicate that selling has occurred first for those areas of the economy exposed to China with electronics companies particularly singled out as supply chains of components was halted due to factory shut-downs in China.   As China seems to have passed the worst of the infection rate, their economy is opening again for business with factories and transport logistics indicating China is 80% back on track to resuming trade.

However, market sentiment has now shifted to expect reduced demand from US and European customers as they now face rapidly rising infection rates and weak consumer demand resulting from voluntary or enforced isolation.  An example is that restaurant chains and cinemas have suffered stock price declines, while stay-at home entertainment company Netflix has done well.

This is all part of a fluid and dynamic shift in outcomes across the marketplace, which is not all bad.  The environment for good stock selection is ripe and a great deal of effort is now being expended on analysing when and how investment returns will emerge.  While many investors were defensively positioned going into 2020, those positions are likely to be resolved in the coming weeks and months as investors re-position for a post-outbreak new normality including recovering consumer demand and improving business prospects.

Where to from here?

As mentioned earlier, similar situations in the past, such as SARS, subsequently proved to offer significant bounce-backs in returns as pent-up demand, delayed through the crisis, rebounded pushing stock prices up as they anticipated a resumption of normality from a recalibrated sense of value.

Whilst our Fund will not be immunised against this market downturn, we believe a well-diversified, disciplinary-positioned portfolio should withstand better with respect to these abrupt market dislocations. The Investment Team is closely monitoring developments and continue to look for good opportunities amidst lower prices.