Hedge Clippings | Friday 13 March, 2020

To say that we are in uncharted waters and facing a crisis of global proportions is probably not only stating the obvious, but also understating the severity of the situation. Whatever the situation was last week, or even yesterday, the reality is that it will have changed significantly (and in the short to medium term, not for the better) not only by next week, but by tomorrow.

We certainly don't profess to have any medical knowledge, or experience in crisis management - in fact one of the problems is that few politicians, or those making decisions, do either. The best they can do is throw money (and at $17.5 billion, I doubt that's even started) at the problem and then act decisively on the recommendations of those with the appropriate knowledge and experience.

In that regard we're pleased to see the advice from Australia's chief medical officer to the Prime Minister and state leaders that non-essential gatherings of more than 500 people should be cancelled has been taken forthwith. In all reality that decision probably should have been taken some days ago, but hindsight as we have always said is a wonderful thing.

If you think we are being alarmist then I suggest you read this article which we received this morning from Robert Swift of Delft Partners. The title of the article, "Act Today or You Will Die" is certainly alarmist, and we would suggest with good reason as it seems to be based on solid information and from someone who has expertise in the area.

Undoubtedly decisive decision-making and quick actions are required, and it is interesting to note that some are now praising China's response to the problem they created in the first place. The Chinese authorities certainly didn't make decisive decisions or act quickly in December when they were first warned of the outbreak of yet another virus which by all accounts emanated from a live or "wet market". By the time they did (brutally if you watched the ABC's 4Corners last Monday), it was all too late. But in reality the Chinese authorities should have acted to close ALL wet markets after previous epidemics such as SARS in 2003, which according to the World Health Organisation was "thought to be an animal virus, possibly from bats that spread to other animals (civet cats) and first infected humans in Guangdong province in 2002".

Authorities around the world, including Australia but possibly with the exception of countries such as Singapore and Taiwan (no doubt benefiting from their experience with SARS), have been playing catch up ever since.

Turning to AFM's database of actively managed funds, their performances in February (in current times certainly almost ancient history) were generally good by comparison with the market, with 16% providing positive returns, and 80% outperforming the ASX200. Depending on strategy and style, some will obviously suffer more than others, although generally we would caution against panic redemptions. The suggested timeframe for investing in a managed fund is generally 5 to 7 years, so unless one is invested in an index based ETF which will track the market (don't say we didn't warn you!) or you have a liquidity issue, it is probably worth staying the course. Obviously, some funds and strategies are more risk averse than others, and that suggestion is not intended as financial advice, be it general or personal!

From the perspective of financial markets, one would have to expect that there is further downside given that the market fell 50% in 1987, and again in 2008 in what was merely a financial crisis. Discussing the current situation earlier today with Alex Pollack of the Loftus Peak Global Disruption Fund (-1.05% in February, an outperformance of over 6.6% vs the ASX200, and 4.1% over the MSCI All Countries World Index), we concluded that the fact that many companies' share prices were already stretched from a valuation perspective in part explains the severity and rapidity of the falls to date. No doubt index selling will have hammered quality companies as well as poor ones, while any with weak balance sheets or tight margins will suffer. Those with weak balance sheets will find refinancing difficult to say the least, while those with tight margins will tip into the red simply because the reduction in their revenues will be either immediate or rapid, and will certainly outpace their ability to cut costs and overheads.

Those sectors obviously in trouble - think travel, education and tourism (Flight Centre to close 100 stores across Australia) for a start - will suffer if they haven't already, and as the days unfold will no doubt suffer more.

Many in the financial services sector (Hedge Clippings included) are fortunate enough to be able to leave their offices and work from home, avoiding crowds, public transport and the risk that close personal contact entails. Spare a thought for those that can't.

Alarmist? Quite possibly. But if Australia's chief Medical Officer has advised the PM and Premiers that gatherings of more than 500 should be cancelled, yours truly is listening.