How to invest during a pandemic

There is a certain seductiveness to a bearish investment argument. The chance to appear like a rational actor in a crazy world. The opportunity to be able to say “I told you so” at a future date. The moral superiority of the cautious investor.

The problem is stock markets usually go up. The world belongs to the optimists, regardless of how (frustratingly!) oblivious many optimists are.

I’m no stranger to the bearish argument in recent years. However, I have been careful to temper my caution in the asset allocation of the funds that we run and take a little more risk. For example, during 2019 while stock markets boomed our growth fund finished in front of all but three other growth superannuation funds (according to Chant West):

My point is we are not perma-bears looking for the next crisis to complain about. I’m trying to establish credibility, so you actually listen to my argument. Because, for me, the time for tempering caution is over.

The time for caution is here

Two weeks ago, we spoke in our podcast about the coronavirus and the dangers it presented given where the world is in the economic cycle. Since then, the news has only gotten worse.

There are two elements to the coronavirus:

  1. Humanitarian. The bigger the shutdowns, the greater the preventative measures, the fewer people will die.
  2. Economic. The bigger the shutdowns, the greater the preventative measures, the more significant the economic impact will be.

To date, the focus has been on minimising the economic impact. That is no longer the case and now (belatedly?) it is about preventing the spread of the disease. Or, for politicians, at least been seen to be trying. The economy is no longer the issue.

I’m not a virologist, and I’m not pretending to be. I don’t have expert knowledge if the measures will work or not to prevent the virus from spreading. I support measures to save lives at the cost of economic growth.

But I do know that the economic measures to date are significant and the world is not well-positioned for an external economic shock.

Coronavirus is not SARS, and it is not 2003

SARS killed fewer than 800 people and decreased China’s GDP growth by about 2%. The rest of the world was fine. The issue is:

  • Coronavirus has already infected far more people than SARS. It may have a lower mortality rate, but it is making up for any shortfall by being far more contagious
  • The containment measures already in place are far greater than the measures for SARS. They will have a significantly greater economic impact.
  • China is more than 4x larger than it was at the time of SARS. At the time the effect on the world economy was relatively negligible. Now it is much greater.
  • Retail, restaurants and tourism are a significantly larger part of the Chinese economy now, and these are more likely to be affected.
  • SARS was limited to five main countries. Even if the Coronavirus doesn’t kill anyone in the developed countries, the greater infection rate and the economic effect of containment will be much greater. Already the U.S., New Zealand, Japan, South Korea, Philippines, Iraq, Indonesia, Italy, Australia and other countries have enacted bans that will affect their own tourism industries. More is likely.
  • SARS was basically at the bottom of the global economic cycle. Debts were low. China still had productive investment. The world was about to launch into the mother of all housing booms. Economic circumstances in 2019 are very different.
  • Central banks have exhausted conventional measures.
  • Corporate debt is at cycle highs.

Where to avoid

Sectors and countries I’m looking to avoid have a number of key elements:

  • Exposure to Chinese demand
  • Reliant on Chinese and global tourism
  • Companies with too much debt
  • Countries with consumers carrying with too much debt
  • Countries with too much debt not denominated in their local currency
  • Cyclical companies, like resources or capital equipment which tend to rise more quickly in booms but fall more rapidly in busts
  • Exposure to Chinese students
  • Banks exposed to the above

Australia ticks almost every box above. Europe ticks a lot. Canada has a decent spread.

The Counter-argument

The best counter-argument is that there is plenty of liquidity out there. Central banks are pumping the world full of money which is what has driven stock market valuations to current levels.

It is a good argument. It is also an argument that has a binary outcome. Market liquidity is a mind trick. If the market believes in the power of central banks, then stock markets can continue to levitate.

Are you confident markets have (and will keep having) complete faith in central banks? Then you have a reason to continue to buy stocks.

However, if you are concerned (1) negative earnings will result from the containment measures (2) the faith in central banks will disappear once negative earnings appear; then come join me on the dark side.

The Upshot

We, and most fund managers, have made a lot of money for investors during the current cycle. In my view, now is not the time to be greedy and to try to squeeze the last drop of performance. Instead, we are taking cover to wait for a cheaper, and potentially a much cheaper, opportunity to buy stocks.

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Damien Klassen is Head of Investments at the Macrobusiness Fund, which is powered by Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Nucleus Advice Pty Ltd – AFSL 515796.

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Comments

  1. C.M.BurnsMEMBER

    Thanks Damien. with the MB international stocks fund – are you taking profits and having a larger % of funds available as cash, waiting for buying opportunities ?

    While also cycling out of countries / stocks that tick more boxes on your checklist, into those that tick less ?

    • Damien KlassenMEMBER

      Yes we have been trading these portfolios a lot over the last two weeks, and another batch yesterday.
      We are going to send another reminder to international investors today: (a) in the Tactical funds we switch between cash, government bonds, international shares and Australian shares for you (b) in the Direct International fund, it remains invested at all times, i.e. investors in these portfolios manage the tactical part themselves.
      If you want us to do the tactical part for you, you can switch it yourself online, call on 1300 623 863 or email [email protected] and we can switch it over to one of the Tactical funds or talk other options.

  2. “To date, the focus has been on minimising the economic impact. That is no longer the case and now (belatedly?) it is about preventing the spread of the disease”

    When will MSM outrage mimic what we saw re the fires?

  3. Thanks Damien. Reasonable analysis.

    I took a similar view and rebalanced my Super to defensive mode again last seek just in time to avoid the recent big falls.

    The S & P is up slightly again this morning but I don’t care. I’ve made very good gains this FY and I’m happy to sit on the sidelines for a while and count my profits while watching what happens.

      • Australian Super.

        They provide easy no-cost options for moving between their premixed-packages of high, medium, low and very-low risk portfolios, or preparing your own mix of shares, cash, property, bonds etc. The risk level essentially equates to the amount of exposure to international and domestic equities. Their “Balanced” or medium risk portfolio still has 50+% equities in the mix, which I don’t think is very balanced, given what super is supposed to be for.

  4. Yep, definitely not a time to be greedy. Lots of open space below current levels. And all bull markets end at some point – the only question is when.

    Also, the longer cycle to consider: 40yrs of debt-fuelled growth. 40yr bull market in bonds and stocks. That will end too. Just a matter of how and when.

  5. Yes, there will be impacts. Whilst the supremacy of USD anchors the primary pumper the age of central bank control won’t end. I just can’t see a near term future where people are throwing USDs in the bin. These guys are the men that sold the world. We’ve all bought it so far.

  6. +1. I do expect to see further share price falls in mining companies that produce base metals. Holding from buying even though some are cheap already. If things get out of hand and this virus spreads all over the world or triggers prolonged closure of manufacturing in China these miners shares will fall lot more than current levels.

    • yeah I’m out…I can’t believe what BHP and FMG are still fetching given the IO price down-swing and outlook… I’ll grab a piece of FMG if it goes low, like $4 low in coming months….

      its hard to get a grip on whether or not the CCP are releasing accurate data on the virus, so the lag in reporting due to testing supplies bottleneck could mean the number of infections is closer to 6 figures than 5… who would know for sure!?

  7. reusachtigeMEMBER

    The best place to invest at the moment is Australian property especially apartments because they may be a little cheaper at the moment but only until the Chinamen return, which will be soon, then they will boom again massively due to pent-up demand. So now is a great time to buy.

    • How true. All those corona victims will have passed all that pent up demand via thier pent up inheritance to a younger generation of the china. When you combine old pent with younger pent you get pent results greater than the sum of the original pent. What out when all the china rush back here to ejaculate all that stored up pent all over the property market.

    • The coronavirus situation is likely to increase chinese distrust of their own govt. Therefore once this blows over expect more chinamen wanting to emigrate and buy property in Australia. More boom times ahead

  8. Continued exponential growth
    https://www.scmp.com/news/china/society/article/3048815/coronavirus-china-death-toll-hits-425-new-cases-hubei-jump

    Warning that Wuhan data may be tip of the iceberg (which is concordant with weekend Lancet article with an estimate of 75,000 infected in Wuhan as of last Tuesday). One major hospital in Wuhan has apparently only had the capacity to test 100 per day.
    https://www.scmp.com/news/china/society/article/3048792/coronavirus-tally-epicentre-wuhan-may-be-just-tip-iceberg

    A few weeks ago, we were saying that things didn’t seem to add up and that maybe the CCP knew something we didn’t.

  9. I’m wondering if this could be the nail in the coffin of the Chinese property market. With the economy at a virtual standstill will people with investment properties be forced to sell to stay solvent, there will likely be few buyers while coronavirus is still growing & with so many empty apartments it can only amplify the effect. The CCP will likely ban sales like with stock market but will the people accept this?

    And where is Xi? Hawaii? Hospital? Home (arrest!!!)? Hiding? Hoping? (None of this is associated with him). Whatever there

  10. Like most of last year, markets could just front run a potential vaccine and explode higher from here. Its the narrative now where bad news is just good news around the corner so jump on.

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