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Michael Savy Blog post by Michael Savy

COVID-19 & Share Market Analysis

Ben Kingsley:    Hello, Ben Kingsley here, Managing Director of Empower Wealth and I’m here with one of the partners of Empower Wealth advisory, Michael Savy, who’s our Chief Investment Officer. So he looks after our Financial Planning team and also over a $100 million dollars of money that we have invested on behalf of our clients.

And obviously during these very difficult times, I wanted to bring Michael in to share some of his expertise in terms of what he’s looking at because what’s actually happening out in the marketplace at the moment is a lot of these soundbites and obviously everyone’s anxieties are really, really heightened.

So I wanted to get some context around this and to basically give some level heads out there because if we can take a deep dive into some of the data and get an understanding of that, then potentially you can be better informed rather than the soundbites or the quick article or the headline that you’re looking at, which is causing a lot of this panic.

So Michael, why are we so panicked at the moment? Why is the market acting irrational?

Michael Savy:   Look, the market is acting irrationally, partly because of the fear and the concern that’s out there at the moment, which certainly has some justification. The magnitude of it is the hard part with any market or the stock market especially and as an analyst, what we don’t like is uncertainty. And that’s part of the problem that we have at the moment.

Trying to get some certainty around the knowns and the unknowns. You know, a favorite saying of yours is the whole known knowns and the known unknowns. So coming back to those principles.

One of the known knowns that we know of is the fact that it is a health issue. It is something that will be resolved with time. And the known unknown is that capacity, which is when will it be resolved and what is the magnitude and the implications, not just for the economy, but even at a household level.

Ben:     Yeah, that’s great. And obviously it’s very challenging for each person to think about their personal circumstances. So what we want to be trying to focus in on and do out of this video presentation today is get an idea of where you sit.

If you’re retiring and you need your money now or in the next 18 months, this is a very difficult time for you. You’re seeing your wealth position fall incredibly, but if you’ve got over three year horizon and just remember that even if you’re close to 65, this money’s going to last you a long time.

And if you haven’t taken money out of the market, then reality is you’ve got a paper loss. You actually haven’t got a full loss at all. So what we want to try and do throughout this video is to take you through a slide deck and this is the slide deck that Michael will also be using. We won’t go through the full slide deck, but we’re going to spend a bit of time on a few of the slides and if you want to basically have more of this information, you can reach out to our Financial Planning Team. And I’ll tell you more that later on.

But Michael, let’s start to look at some of these slides and let’s try and put them into context because I think what is really important here is as everyone has said and no one is disagreeing, is that this pandemic will pass. That we will see a peak in terms of the contagion. It will pass. But also there will be treatment programs and there will also ultimately one day be a vaccine. So we will be able to develop something that will kill this virus.

So with all of that, if we just keep reading the daily newspapers we’re basically in this, period of panic and fear. So what is it that you’re looking at? Let’s bring up the first slide. We’re looking at China’s story here.

So what is it about China that you’re trying to learn?

Michael:           What we’re going to go through here is a little bit of a case study on China. Now, China has gone through a number of these; the SARS, the swine flu and now obviously this current issue started in China. And a saying that I’ve always heard is that generals have a tendency to fight their last battles. So what we’re doing is trying to understand what happened previously and how can or how do we mitigate some of those things.

And it’s not just simply looking at the virus itself because we’re seeing that in the bond markets and what the central banks are doing.

Effectively stage one was doing an interest rate cut and then bond buying programs and so on and so forth in the Quantiative Easing.

Now that’s certainly the tact that they used during the GFC and they’ve sort of deployed that. The thing that’s been impressive so far has been the speed of which they’ve come to the party and try to counteract this move.

Ben:     I mean, they’ve learned from the GFC exactly what they need to do to ensure that there is liquidity in the market. So let’s go to the first slide we’ve got here freight logistics. Talk to me about why you’re looking at Freight.

Michael: So obviously the key thing is that China, their first cases were somewhere in November but broadly known in January. They quickly went into a shutdown. So they made the tough decision to shut down the key areas and quarantine.

And so obviously that slowed down and then we want to see what happens once everything, to some degree, returns to normal. Now what I’ve got here is the charts looking at the freight logistics movement of goods around the country. In the bottom chart we have the daily production, which is a general tracker of activity.

But the most important one on, which I’ve blown up is the coal consumption, which is a proxy for the electricity use and general industrial activity as well.

So you can see there in the charts, leading into the Chinese New Year, because usually the Chinese stop for two to three weeks to celebrate New Year. Once they come out of that, it normally ramps back up.

Ben:     So that’s this here.

Michael:           That’s right. And so obviously this time around during the new year, we had this shutdown and the containment that China executed and so they went into lockdown. And what we’re seeing now by tracking some of this data, we can see that it’s starting to increase to the point that depending on industry, some industries are back at nearly 90% to 95% capacity.

Some of the industries are starting to pick back up at the 60% but overall aggregated it’s somewhere between 60% and 80% is where they’re back at to the point.

Ben:     First of all, we saw this as a supply shock. Didn’t we? Where the components that they were making. Because obviously China is very much an export nation as well. But now we really are on the demand side in terms of that right?

Michael:           Absolutely. And this is to some degree when we come back or when we speak about the market, in February we’d started getting half year reports and I think we were a little bit blase and in general the markets, because we were getting numbers out from the companies. The market was still going up.

Ben:     That’s that lag data.

Michael:           Yeah, so that was coming through and it wasn’t until we had our first cases here that it really hit home, but up until that point we heard news about the virus but it was more a supply issue. We weren’t going to get the toilet rolls and we weren’t going to get certain suppliers of goods to continue doing or running our businesses. But now that it’s hit home, now we have a demand side issue and we’ll see that in the charts with the Chinese markets as well where it reversed out. But now the stock market itself is starting. The Chinese stock market is to come back down because now they have a demand issue.

Ben:     So hence the goods that they want to sell offshore, because the global economy is slowing down, we’re starting to see their activities also starting to head south.

Michael:           So the key takeaway from this is that yes, trying to address the known unknowns, which is when it becomes managed, and for most people it’s trying to find a point where the government can come out and say, “Yes, it’s controlled. Cases are decreasing and it starts to plateau.”

And that’s a big word that you’ll hear a lot if the rate of cases starts to plateau.

There’ll be some comfort around that. And we can see here in the China data that once it gets to that point and life returns to normal, and we’ve got clients who work in China, and we’ve got fund managers and portfolio managers who have offices in China, and their feedback is that, “Yeah, it’s returning to normal.” But their definition of normal is that people are still walking around with masks, still wiping their hands and washing their hands, but they’re getting back to business.

Ben:     That’s why the fear is so great at this moment in time in Australia where, obviously, earlier this week we saw bars, restaurants, all areas of congregating is basically being banned in doors because we’re trying to get this social distancing as you and I are practicing right now. We normally wouldn’t be this far apart.

So, with that message, now that China is … As you say, they’re all practicing very good hygiene. They are wearing masks. There is still a program of disinfectants going on everywhere in terms of public transport to try and minimize the second phase of that, whilst, obviously, we still see treatment programs and trials happening globally. We’ve mobilized that story pretty well.

That’s a story to sort of say China has got through the other side of the first phase, but we’re still in a relative panic because we basically are seeing people in unemployment queues now, as of yesterday. And we still don’t know how much our hockey stick curve is going to grow before we get on in terms of how much we contain it versus not contained. So that’s a good message.

Michael:           If we were to look at or assess this particular scenario or event that we’re in, it is a health crisis so we have to assess and understand the health crisis.

We’re not experts. We don’t have medical degrees, but certainly a lot of the news that we get is no different from where most of our clients will get as well.

We’ll get a little bit more information from our fund managers and other third-party suppliers. But our job is to, I guess, disseminate all that and to try and come to an understanding. And what we are understanding is that, yes, it is a health issue, which has now caused, in my mind, a mobility issue.

So, it’s interesting because a lot of people were comparing it to the GFC.

During the GFC, it was not so much mobility or fluidity of movement of people, it was fluidity and movement of capital.

Banks froze and we saw that in the credit spreads jumping and so-and-so forth.

Ben:     Asset price devaluations and the whole bit.

Michael:           Exactly. And here the instigator of this is mobility. Demand is still there, but we just can’t execute on it. The supply can be there, but we just can’t get it there. So that’s the issue that we currently have, which originally was a health issue, but that’s the current issue that we have.

Ben:     That’s the key issue. The key issue is the moment you get mobility back, the money that the stimulus programs and all of those type of things, people will have that money to spend.

Ben:     So we’re waiting for this period of containment and quarantine and slow down, and then we get out of the other side of it and then hopefully we’ll see a shift.

Michael: Exactly and because of that issue, and certainly, I’m on the more optimistic end, of when we see the light at the end of the tunnel on this matter, but the big question that a lot of fund managers, professional money managers and small business owners, which is probably the most important factor.

For small business owners, when will they start to see that part of the equation or the light at the end of the tunnel?

And that really is the issue that has crossed over into the financial market, which is what started as a supply and demand issue now is starting to go into the credit markets. And we already saw the volatility in the markets in, let’s say… It was actually February 20th, the first case and the following Monday we saw the drops and that was the early stages.

The second part to that, which was interesting, last week we saw property A-REITs in Australia drop by about 27% in a week. And partly, that was a factor of looking at the future demand and also bond spreads going up and hitting their prices there.

That is the million dollar question … Billion dollar …

Well, looks like trillion dollar question, is when can we come out of this and what is the financial impact during that period?

So some businesses, possibly, will go belly up. Some larger corporates and we’re seeing companies raising money at the moment because they’re desperate for the funds to prop up their balance sheets. But certainly, what we’ve seen from the government, especially central banks around the world, they have all come out and said they’ll do whatever is needed to getting us across.

Ben:     I think it’s a really clear sign. They’ve said whatever it takes. We’ve heard Governor Lowe talk about this bridge to get us through. You’ll also hear the prime minister talking about they will continue to look at their war chest in terms of what that looks like. But it’s a gradual stage. You walk a mile, see a mile and you put the initiatives in place that you think will get us through that particular period.

Michael:           And I don’t want to underestimate what they’re doing. In fact, I commend them, the central banks at least anyway, because they are keeping the financial system running. And a lot of it goes over the head of a lot of our clients. It’s not what people turn to when they are looking through the papers.

Ben:     Yeah, the general public don’t look at this sort of stuff, do they?

Michael:           The way that I try to explain it to our clients is that, if we use a car analogy. The central bank around the world, what they’re doing is they’re putting the oil in the engine, they’re servicing the car to make sure it’s running and it can go somewhere. The problem is the fiscal component, which is the government’s politicians, they have to come to the party because this problem will not be resolved with purely monetary policy.

So the analogy that I used there is that the central banks are servicing the car, getting it ready. We still need the petrol from the government so the fiscal stimulus. But fundamentally, even if we tick those two boxes, we still need the driver to have a destination and want to go. And that’s the human, the household.

So everything is trying to be done to get the car ready. We just need to make sure that the health system and the containment is managed and that’s when we have the driver ready to drive.

Ben:     And I think it’s an excellent analogy, right? Because in terms of whether it’s drive the car or get on the plane and go on the holidays or what have you, if we have mobility, we’ll go and buy our coffees at the coffee shop. We’re go and grab our lunch and take-away. We’ll go and do those things so that’s the first bit of mobility.

The events will come back and sport will open back up. We’ll go to the footie on the weekend and then we’ll go, “Well, look at the holiday offers to Europe.” Now, that I know that I’m safe, from a health point of view, then all of a sudden I’m like … And everyone I know is safe, my family is safe and I’m financially okay. All of a sudden the cogs of the economy will start to turn again and we’ll start to see all of these green indicators that the economy is building and that job’s there. So we do know people will lose their jobs. I mean, it’s obviously already happening. Now, let’s move on to the next slide.

So Michael, what’s the relationship between new cases and the share market here? And are we seeing a recovery?

Michael:           Absolutely. That’s a good segue just to have a look to see what has happened in China itself. Again, when looking at the China case study to try and learn from what may potentially happen.

Ben:     So that’s the Chinese markets coming down.

Michael:           That’s right. You can see the Chinese stock market started coming down in January as the cases started to increase. Once they had the containment and cases started to decrease, we can certainly see that the stock market started to go up. So the important message to see here is that the stock market will move before there’s a vaccine. They won’t wait for that.

Ben:     Ultimately, the markets are trying to predict future. And once they have some comfort in terms of that we are … Right now, we’re still in panic because technically the virus is still spreading. And there’s no answer for the containment of the virus at the moment. And that’s obviously why we’re seeing the stock market’s going down. That’s the global recession that we’re in, generally.

Michael:           That’s right because the issue that was contained in China is now a global issue. So now China has a global demand issue. So that’s why their markets are starting to come back up.

Ben:     So let’s talk about this one over here. Breathe with a bit more ease

The Optimistic vs. Pessimistic Model

Michael:           This one here is coming back to our conversation that, on the other side of it, once the drivers are ready to move, once they have some comfort, how is it likely going to play out in terms of the markets.

Where is the economy going to go? And so what we’ve got here is just really having a look at the containment side of things where we know what needs to be done at the moment.

So the issue that we’re seeing and why the market’s still quite volatile is that, unlike China, the US and other parts of the world aren’t containing their issues. They are not as effective. One of the things that we saw there was … In some other data was that China on average took around about 8 to 10 days to contain once someone was diagnosed with having the virus, to lock down the people that they had associated with and to go into isolation, or self-isolation. What we’re seeing is that in the Western world, it’s taking 20, 25, 30 days to achieve the same objective.

But if the Western world or the US took that hard line decision to do the shutdown, you can see there how it’s impacted the Chinese case rates.

So obviously there was a worst case scenario, optimistic scenario, and if everything went to a grinding halt. And you can see there in terms of the actual numbers, it’s certainly on the more optimistic level if you make the hard decisions.

Ben:     Correct. And I think the other important point to note that we still expect more bad news because of what’s happening in the US around their testing regime. With the testing rates being inadequate and low in terms of what they’re testing, there’s potentially going to be a shock in terms of just how many people actually have got this particular virus, the COVID-19.

Michael:           Absolutely. And that comes back to your known-knowns in the sense that once the data comes out, it will create a market shock to some degree. But it’s a known-known that if you test more, you’re more likely to find more people within those.

Ben:     And the markets are already thinking about that. But in terms of once that becomes public knowledge, it’s all of those smaller players who will be panicked. Whereas, the professional investors would also know that, “Okay, well the likelihood is because we’re not testing as much in the US and the pandemic’s probably a bit wider spread.”

So we’ve probably got that to play out over the next couple of weeks. And then after that, if we see what’s happened here in regards to the optimistic versus pessimistic model, once we then realize that there is a slow down occurring in the major countries, I suspect the buyers will be ready because there has been an enormous flight to cash in terms of what we’re seeing globally.

Is that the read you’re getting?

Michael:           Yeah. Look, and certainly there’s two reads that I’m seeing, and the flight to cash certainly in the early days for markets. But equally, there’s a lot of fund managers, value style managers who in the lead up to this, including myself, was planning for a recession. So having a bit more cash on-hand, I didn’t expect the coronavirus to get me there. But there’s certainly an arm or segment of the money managers who was holding on to a fair bit of cash, and so they’re strategically buying back in at the right times or when the prices seem appropriate.

And then there’s the other side where they either through a function of their investment mandate, they must hold or be fully invested. And what we’re seeing there is some reallocation of holdings from obviously the growth stocks into more of the defensive. But in the process coming down with the markets as well.

Certainly, in our experience so far, a lot of our clients … The general consensus is that, yes, they can see that it’s going to be okay on the other side. A smaller portion are concerned about the damage that the media term. So it’s about managing their expectations and also that comfort level.

Fundamentally, everything that we do must pass the sleep test.

Ben:     So is that part of the case by case scenario?

Michael:           That’s right.

Ben:     So effectively, there are some people who have a great opportunity here and they’re taking advantage of it. As I said, the sleep … Got to pass the sleep test. How comfortable do they feel about that?

Because if I was to ring you today and have a pot of money, what is your view for someone my age in terms of what should I be doing?


I think one of the most underestimated factors in investing is timeframe.

They see something that’s dropped 50% and see opportunity. Timeframe is the other factor, which I think is probably more important. And in your scenario and those in your age bracket. Say 45 to 55 certainly have that timeframe that allows you to take an opportunity when the market hits the level that you’re comfortable with, then absolutely being able to get in and holding onto that asset for 3, 5, 10 years.

Because fundamentally, when we’re doing the modelings and the assessments on companies or markets, we’re not doing a model on a one-year outlook. We’re looking at a 5, 3, 10 years outlook which are normal business conditions.

And so, the conversation that I have with our clients when they are inclined to go to cash is to first ask, when do they intend to retire? And will that be within the next period … Let’s say, for example, as you said, if someone’s looking to retire right now, then that’s dangerous because the reality is their portfolio is probably doing about 20%.

Ben:     Well, we saw a lot of people go to cash in the GFC and they made a terrible mistake by doing that, didn’t they?

Michael:           That’s right. And it’s human behaviour because you want to protect what you’ve gone. You don’t want to do lose what’s yours.

It’s called Loss Aversion. But equally though, on the other side of it, which is the biggest danger that we have right now in this particular moment.

Even for the most courageous of us out there, as we see our portfolios go down and down and down, it gets to a point where we see a number and we get concerned.

Now, the danger there is that we go to cash and then we miss the upside reversal.

So being whipsawed, I guess, in that expression. So the question then becomes, when will that turn? Which is the, again, trillion dollar question. When will it turn?

Ben:     And how quickly will that recovery be?

Michael:           That’s right. So again, when we look through history in terms of cases, SARS for example, the market dropped 12% from January to March. The reversal occurred from March onwards. The vaccine itself wasn’t actually approved until December, January the following year.

So again, the market will not wait for the vaccine. It simply will wait for containment.

Ben:     I think that’s a really important message.

Michael:           And the fact that we can control. But coming back to our clients and anyone else that is looking to see if there’s an opportunity, the key thing is to make sure that you do have a strategy. And that even if it is a bargain, that you’re not going to sell it because you need to do a bathroom.

And which is why time is really quite important when assessing whether you go in to take the opportunity or not.

Ben:     So Michael, we’ve been talking about time is a very, very big consideration in terms of your strategy. What are the other ones that we need to be focused in on?

Michael:           Look, absolutely. Once you know, assuming that it’s within your timeframe and before you start executing or looking to make a decision, the other considerations that you may want to, or what we discussed with our clients more importantly, is the other factors and inputs that are evolving around this particular issue.

So obviously we know that it’s a health issue, and what we’re finding at the moment is that there is a reaction and then a counter-reaction.

The cases go up, the government makes their move, it gets worse, the government pulls the next trigger. So we’re seeing this reaction and counter-reaction coming through. So the issue there is to come back to first principles. It’s a health issue, which is why one of the key things that we’re looking at is the daily rate cases because the population needs that comfort level to know that everything’s going to be okay.

Ben:     Correct. And I don’t think they’re there right now. It’s a panic.

Michael: In certain parts of the world where they’re certainly nowhere near there. You know, they’re still debating on what to do, as opposed to actually taking action. The other key factor there, which we won’t find out because unemployment data comes out pretty slowly, is the magnitude of this, once we get some details in. There’s different forecasts somewhere between 8%, 10%, some saying 20%. Again, we will need to see that and different sectors will be hit harder than others, so it’ll be interesting to see some of those datas.

Ben:     In my updates that I’m also going to be doing will be regarding economic updates. What I also think is going to happen is the participation rates are going to go through the room. Because in reality, if I can get that extra $550 a fortnight, I’m going to put my hand up as a job seeker. So I think we need to sort of be mindful.

Michael:           And that’s the danger of data.

Ben:     Of the true unemployment rate versus the participation rates. So there’s something in that and I think we need to examine that for people.

Michael:           So this is where you have to look at the data but also apply judgment as well. Unemployment and containment are certainly the forefront of a lot of our clients and for most mums and dads. But then on the other side we look at the policy response that the government has made. And then also it’s important to have a look at the natural stabilizers that are seen to be kicking in, for example.

The policies response from the governments, the fiscal stimulus, as I said is really important because it hits home to the source of the problem, making sure that households can stay afloat, businesses stay afloat, so that we can trade out on the other side of that.

The question is-

Ben:     And the other great cautioner is the exchange rate, the Aussie dollar.It’s Definitely coming down, which is making our exports more attractive.

Michael: That’s right. So these are those natural stabilizers that are kicking in at the moment. At the moment, we have our currency. The natural reaction in a crisis like this is for people to sell commodity based currencies, like Australia, and send it off to the U.S., or the Yen to Japan, to some degree, because that is their safe haven currencies.

So our currency is certainly going down. But that also means that our exports become more attractive.

Obviously again, not everyone benefits the same way. Our importers will get hit to some degree, but then when we look at certain businesses like the miners who are now going to be shipping their iron ore at still reasonably high prices, at lower petrol costs and freight costs for them. So there’s winners and losers.

Certainly in different scenarios there, but the natural stabilizers, as I said, currency, the oil, thanks to Putin more so, but that certainly benefits certain parts of our economy.

Ben:     I think again it comes back to the classic, any businesses that have got extreme debt attached to them, they’re going to have to manage through this period and it’s going to be difficult for them. But good solid businesses, good blue chip stocks, good blue chip companies, it goes back to the quality of the business is also to play out there.

So in closing, what we want to basically do is focus in on what your particular scenario is.

Remember it’s always case by case, don’t necessarily listen to the generalizations.

There may be a wonderful opportunity here for you, or there may be nothing you need to do, or it may be some planning that you need to do.

So my first question is if you don’t have a strategy in terms of an investment strategy and you’re looking to do this yourself, then it’s time to contact your superannuation provider and understand what type of investment strategy they have got in place for you. Are you balanced? Are you growth? Those types of things. It’s really important for you to know what’s happening with your money.

Now if you are an existing client of Empower Wealth and you want to just reconnect on your strategy because most of our clients would already know that it’s set and forget, because they have that strategy in place and they’re playing the long game. But if you’re not quite sure then obviously you can reach out to Michael and his team in regards to what that looks like for you.

Now if you’re an Empower Wealth client or your prospective client that you may be looking at working with us and you want a second opinion on the current strategy that you’ve got going, our financial planners are available here also, where we do offer a free consultation for an initial appointment.

So to do that free consultation, we you need to do is go to our website which is, go to book an appointment, and select financial planning. And we will get that particular appointment organized for you. It is uncertain times, but it’s also, as most value investors will tell you, it’s also wonderful times to take advantage of that, if you’re in a position to do so. So thanks for watching and if we see any need for a further update in the next weeks or months ahead, we will do that with Michael. So Michael, thanks very much.

Michael:           Thanks, Ben.

Ben:     Thanks joining us. Appreciate it.

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