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Economics & Markets

Learnings for Aussie equities investors as a shutdown looms

By Dermot Ryan
Sydney, Australia

The lockdown measures in Australia are at their beginnings, sending markets into a meltdown. For nervous holders of Aussie equities, it’s worth remembering there are two situations to brace portfolios for: the course this pandemic will run, and the inevitable recovery.

Getting the facts right

Though the number of cases in Australia of COVID-19 seem relatively low compared to global counterparts, this virus is spreading quickly through a global population with no immunity, and faster than modern medicine and governments can keep up.

Australia is rated as one of the countries most prepared to cope with the outbreak1, but it needs to be paired with a rapid response plan. Masses of people requiring treatment all at once – when regular flu season is on approach – is a significant consideration and concern.

Like much of Europe and Asia, Australia is also resorting to the basics to stagger the impact of the virus on its healthcare system – social distancing, isolation and quarantine.

The relatively sudden and highly disruptive impact on normal social functioning is, of course, having an impact on the companies and services which have enjoyed a period of predictable demand and a long bull run.

What we’re bracing for

Australia may soon need to make more pronounced moves to reduce the spread. This may include tougher travel restrictions and school closures. These decisions, if taken, would rightly put health and well-being outcomes ahead of economic ones but would come with more market volatility.

Further, we expect now that Australia will experience two consecutive quarters of negative growth, causing the first recession since the early 1990s.

Though it’s hard to fathom at the moment, there is one important event we are bracing for also: a recovery.

As it stands, shares are likely to see further short-term falls given the uncertainty around COVID-19, both in terms of the duration of the outbreak in Australia and worldwide, and the extent of its economic impact even in the case of containment. However, for the next 12 months, we expect total returns to be helped by an eventual rebound in growth and supportive policies.

Measures we can reasonably expect from the government and central bank include:

  • Quantitative easing.
  • Policy stimulus.
  • Fiscal stimulus. 
  • A cash rate cut.

It’s important to remember both of the realities to realise the panic will endure, and it will also end. Now is the time for careful, rational and long-term strategies to be an absolute focus, to ensure we get through this period without wearing the cost long-term.

Some golden rules

Here are some golden rules we are considering:

  • Stick with companies who have good balance sheets for now.
  • Be ready to assess capital raisings, as some companies will need to come to the markets for fresh equity and there will be some great deals on offer for new shareholders.
  • Use the dislocation to high grade the quality of our portfolio.
  • Be very wary of investing in some of those loss-making and high valuation sectors like IT, as the markets toleration for business models that need constant funding will change.
  • We now must be close to peak panic, be an opportunistic buyer if we can, and if it suits our long-term strategy.

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Dermot Ryan, Co-Portfolio Manager (Income)
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While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. The information in this document contains statements that are the author’s beliefs and/or opinions. Any beliefs and/or opinions shared are as at the date shown and are subject to change without notice. This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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