Marcus Today SMA | March 2020 Update
Where do we even begin…We are witnessing history. Both in the stock market and the broader world. Countries in lockdown. Fines for leaving the house without a good reason. Cafes, restaurants, bars, clubs and pubs all closed. Sport on hold. And that’s not even the half of it. Completely unprecedented times.
FUND PERFORMANCE MARCUS TODAY GROWTH SMA (MT0001)
*Marcus Today/Thompson Reuters | 09/03/2020 | Details correct at time of publication. Past performance is not a reliable indicator of future returns.
The Growth SMA fell 2.99% in March, outperforming the 20.83% fall in the benchmark S&P/ASX 300 Accumulation Index by 17.84%. For the quarter the Growth SMA fell 4.87% while the index fell 23.41%.While it is never a good period when capital has been eroded, we are very pleased to have performed as we have, and more importantly we are extremely pleased to have protected your capital. In this historic moment of uncertainty stock selection takes a backseat to asset allocation. It is all about whether you are in the market or in cash. On the 23rd of March we were out of the market sitting in 70% cash. By the 25th we were in 7% cash. In that last week of March the SMA rose 9.4%. Among our best performers in the rapid rally that ended the month were APT up 29%, VOC up 27%, MFG up 19%, JBH up 19%, RMD up 16% and NAN up 15%. MARCUS TODAY EQUITY INCOME SMA (MT0002) *Marcus Today/Thompson Reuters | 09/03/2020 | Details correct at time of publication. Past performance is not a reliable indicator of future returns.
The Equity Income SMA fell 10.33% in March, outperforming the 21.38% fall in the benchmark S&P/ASX 200 INDUSTRIAL (TR) Index by 11.05%. For the quarter the Equity Income SMA fell 12.83% while the index fell 21.91%. The gross yield for the March quarter was 2.13%.As is the case with the Growth SMA, it is bittersweet outperformance. The Equity Income SMA’s performance would have been better if it weren’t for an overweight position in the banks through February.
Similarly to the Growth SMA, the cash weighting in the Equity Income SMA fell from 67% on March 23rd to 5% on March 25th.
THE MONTH THAT WAS
The chaos took its toll on the world’s markets in March. Since peaking in late February, the All Ordinaries Index fell 30% - and it would be worse if it wasn’t for the 15% rally we saw in the last week of the month. The energy sector was the worst hit, down 52% after falling as much as 59% as the price war between Russia and Saudi Arabia added to the woes.Although we have just seen a bounce, there was no market immune from the carnage. The Italian and Spanish markets have been the worst hit, down 33% a piece, while the Dow Jones has dropped 26%, the S&P 500 24% and the NASDAQ 22%. *Marcus Today | 09/03/2020 | Details correct at time of publication. Past performance is not a reliable indicator of future returns.
FLATTENING THE CURVE
France Italy and Spain are all seeing the trend of deaths slowing down - a “Light at the End of the Tunnel” – some countries are talking about lockdown ending at the end of April. The horrible headlines continue but we are getting numb to them because we all know the stock market is going to anticipate the top of the virus spread and regain some confidence well in advance of the actual case number top. There does appear to be an end in sight at this point.
Australia is outperforming much of the world with a flattening case curve. If international investors were worried about which countries to be underweight, Australia is not one. Plus, if the virus is contained sooner rather than later, and economic growth expectations improve, the A$ will rise giving international investors in our market "double bubble" - the benefit of rising stocks and a rising currency.
THE OIL WARAfter weeks of negative news, we saw a positive oil headline last week. Trump is trying to broker a truce in the Saudi Russia oil price war and who knows, it may just happen. The oil price was up 24% on Thursday in the US and up another 15% Friday. OPEC have called an OPEC+ Emergency meeting, everyone seems to be coming on board, Russia, Canada, Brazil, the US. If the war ends the sector will still be under a coronavirus cloud and become a barometer of virus sentiment – it will outperform in the recovery and underperform if it turns for the worse.
With our current (optimistic) stance that absent “negative shock” the market may have seen the worst, we’d be happy to stay overweight the sector even after this ‘pop’.*Marcus Today/Thompson Reuters | 09/03/2020 | Details correct at time of publication. Past performance is not a reliable indicator of future returns.
There may be some smoke and mirrors, but whatever the embellishment there seems to be some progress. There was always this risk that the OPEC Russia stand-off ended abruptly and we saw the oil price spike.
We have seen enormous levels of volatility. Our local market has seen numerous intraday moves of 300+ points. The Dow Jones moved an average of 1,429 points daily over the last two weeks of march. Historically the usual trading range is between 80 to 150 points with the occasional spike to over 600 points in a correction. It only got to 680 points in the GFC. At the current level of the Dow Jones 1,429 points represents a 6.7% range a day. Unheard of. You have to assume there is some technology change between 2008 and today explains it, perhaps the robots really have taken over the asylum.However, for the moment it appears volatility has peaked. It’s still a long way from normal, but it’s settling and that is a good sign. *Marcus Today/Thompson Reuters | 09/03/2020 | Details correct at time of publication. Past performance is not a reliable indicator of future returns.
Other features of March:
- With much of the world in lockdown corporate earnings have been drying up and dividends are expected to follow. Macquarie have already downgraded dividend forecasts for 40% of their research universe. In the GFC 63% of their researched stocks reduced their dividends and 3% suspended them.
- The Australian dollar is the barometer of global economic growth. If it falls, as it did sharply the moment this started, it suggests that global economic growth is going to slow. When it rises it is an indicator that global growth fears are dissipating. The US dollar is doing the opposite. As you can see, the currency markets are anticipating an improvement in global growth sentiment from the recent low.
- Commodity Prices – Another market that prices itself on global economic fortunes. Iron ore dropped and is recovering:
- The Bond market – This is the US 10-year bond yield. The growth hole that is opening up combined with unprecedented central bank rate cuts, the resumption of money printing and the flight from equities to bonds means the bond yield has collapsed. Now 0.24% in the US.
- The RBA had a busy month making an emergency rate cut, buying billions in bonds as part of its daily bond purchase in its first-ever quantitative easing program and suspending its deep dive into BNPL.
- Unemployment numbers took a hit in the US. March nonfarm payrolls dropped more than 700K (vs -145K consensus) and there remain expectations the April print could be much worse as the March report does not count many of the ~10M workers who claimed unemployment insurance in the final two weeks of the month. Our local unemployment isn’t expected to be pretty either.
- Consumer confidence dropped to a record low in the last week of March. Can’t say that was a surprise
THE MONTH AHEAD
Much of our strategy discussion in the last couple of weeks has surrounded the banks and oil.The banks have their results soon. They are going to announce a big increase in provisions and may even go overboard which gives them a big cushion to add back in later results – but for now, results are going to be messy. Dividends will likely be cut. They may even suspend them. The question is whether the fall in the stocks already discounts that. Hard to know. We have hedged our bets with market weightings in both SMA’s – it’s called ‘neutral’ weightings in the fund management world. With our current (optimistic) stance that absent “negative shock” the market may have seen the worst, we’re happy to stay overweight the oil sector even after this ‘pop’. The oil price will become like the A$, and commodity prices in general, a barometer of economic sentiment. Without the oil price war the sector will start to reflect the economic sentiment which is being driven by the pandemic sentiment. So, the energy sector will become a geared CV-19 sentiment proxy. PROFIT WARNINGS TO COME
We have had over 130 All Ords companies make CV-19 related announcements of which over 100 included withdrawn guidance and distributions. That’s since February 20. There is no way those companies have been able to assess the actual CV-19 damage – those announcements were extremely premature. There are a lot more fundamental admissions to come, from the same companies as well as other companies that haven’t said a thing yet. Its like the results season, you can get blown up in individual stocks at any moment. It’s a dangerous time. More so than usual. There is so much damage being done on a corporate level, but so little specific feedback yet. It’s coming and it won’t be good.
A FINAL WORD
Staying fully invested for now.We know our current asset allocation (93% invested) could be wrong, of course it could, but we are utterly prepared to go to 100% cash again if we need to. The best you can do in this uncertainty is to wake up every morning and make decisions. There is no playbook for this. There is enough technical evidence to suggest that if the newsflow doesn’t ‘shock’ and the current virus conditions persist, which includes the assumption of the curve flattening in the US, UK and not resurging in China, then the market should continue to quietly regain confidence and lose its volatility. As we settle down stock picking becomes more important and our focus. 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 - A vaccine. Drugs to alleviate symptoms that reduce morbidity rates.