We are not trying to buy companies that are in ICU
Short Points Today – have been caught doing some media this morning.
- Very happy we were fully invested for the 7% rally yesterday.
- The best case scenario now is that we all get bored. If we do, if we get numb to coronavirus cases, if we get numb to the economic damage, the markets might just hold on to this rally, the volatility might die down, and stock market confidence might slowly seep back in as we quietly move through the virus timeline to the other side.
- Even better scenario – Vaccine. Drugs to alleviate symptoms that reduce morbidity rates.
- The biggest risk from here is "Negative Shock". That the virus situation seriously deteriorates again. That we see new news that is significantly negative. A resurgence of cases in China and South Korea. A mutated virus. Infection in the US accelerating unabated. No flattening of any curves. At this point the 'quietly moving through the timeline' scenario is more likely than the significant deterioration scenario, which is good. But it could happen. Negative shock is the one thing that would prompt us to sell again.
- Be careful about stock selection. There is a significant risk of negative shocks from individual stocks – virus aside. Some could shock us at any moment. Avoid the risks. Its like results season, you can never know when you are going to get blown up. But buy into travel, airlines, casinos, hotels, retailers too early and you might well be blown up, today even. We are not prepared to take an aggressive approach to stock picking yet, we are not trying to buy companies that are in ICU that will miraculously survive. At the moment we are playing it safe – there will be time for those 're-capitalisation trades' later (companies issuing cheap equity in order to survive), but surely not yet. For now, the main call is being in or out of the market, not trying to buy low odds survival cases for spectacular gains. Avoid companies in the front line that are taking damage. No doubt there is an opportunity someday, but this is not the main game. It's not time for them yet.
- The riskiest thing we have done is target a few energy-related stocks. The damage in that sector is extreme, most of the damage is unrelated to COVID-19 and we could see a resurrection on a single comment at any time.
So there is no reason to change anything today.
THE BIGGEST BOUNCERS
Here is a table of sector performances since the sell-off began – the right hand column shows how far each sector has bounced from the bottom. You will see that after the 7% rally yesterday the ASX 200 is 17.69% off the bottom.
You will also see the Healthcare sector is the third best performing sector from the bottom – up 27.14%. When buying back in we thankfully targeted healthcare as a sector, because it is low risk and is relatively insulated from lockdowns/social distancing/closures. It is a sector that is also relatively insulated from economic weakness and having been hard hit in the falls, previously sought after stocks were, for a rare moment, looking ‘cheap’. Government money is pouring into the sector and government should continue to prioritise the sector for funding. Plus we are effectively in the middle of a healthcare boom with untold opportunities for the participants.
You can see the other sectors that have bounced so far many of which are the sectors that have been the worst affected. Come an improvement in market sentiment the hardest hit sectors are potentially those that will recover the most. They include:
Financials, IT (High PE growth stocks), Transport, Hotels, Leisure, Auto, Consumer Discretionary. But not yet.
Many of those sectors are still down 30-40% – should the market ever relax about COVID-19 these are the sectors to target for a rally but for now 'negative shock' announcements are still ahead for individual companies. Like VAH today.
The biggest recovery sectors – Come the sentiment improvement, the biggest opportunities are going to come in the Energy sector and the REITs. The REITs got smashed in the GFC as the credit markets tightened up and they struggled to roll debt. This is clearly the fear at the moment. The moment the credit markets relax the sector will come flying back, but the risk involved could be precipitous from here so the sector continues to be avoided.
Energy is a separate storyline to COVID-19. The oil price would have fallen significantly anyway on fears for global economic growth but has been dealt a double blow in the shape of a Russia – Middle East oil price war. This is doing the high-cost US Shales gas industry untold damage. You have to assume that this oil price standoff/posturing will one day come to (a possibly abrupt) end, the oil price will lift and the sector will fly from its lows. You will see Trump overnight calling for energy ministers to talk. It could happen any time.
- NSW introduces fines for any gatherings of more than two.
- The police in WA are bringing in police drones to police social distancing (Big Brother?).
- Virgin Australia (VAH) is seeking a $1.4bn bailout/loan from the government to stay in business and envisages the government taking a stake in the company.
- Shane Oliver is talking about 15% unemployment in Australia although it may only appear to be around 8% if the government subsidy keeps jobless people out of the unemployment queue.
- An Industry fund CIO is quoted as saying “we are going to get smashed” by people selling to access up to $20,000 of their Super with a lot of assets like Private Equity, Infrastructure assets and Property being illiquid and hard to sell. But before you get worried about the equity market, if all the 1.3m people the government expects to access their super did so to the maximum amount then you are talking about $26bn of Super being liquidated. Its a drop in the ocean.