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Market Update #3 – General Advice Posted on March 10, 2020

Volatility

Market volatility continues.  

Here’s what we know now. As it stands this morning, the market has declined a further 7.8%.

Likely triggers:

  • COVID-19 continues to spread across the world. The share market is responding to the threat of further spread, as well as government policy responses.
  • The US Presidential candidacy is underway, with Election Day set for 3 November 2020. Biden has staged an unexpected comeback for the Democratic candidacy, unsettling market predictions.
  • Global oil prices have decreased as relations between Russia and the world’s largest oil producer – Saudi Arabia – broke down over the weekend. This break may be temporary. Negotiations are underway.

Potential scenarios:

The global investment group, Pendal Group has this morning outlined the below four scenarios, and flagged what investors can do assuming their likely impact. We broadly agree with these scenarios, and we acknowledge that we are uncertain as to what scenario will occur.

1. Widespread global pandemic – a worst-case scenario provoking a sustained global recession, zero rates, unconventional policy responses and further material falls (>20%) in the equity market. We think this is a low-probability outcome.
2. Rolling outbreaks globally – short-term economic downturns of 2-4% followed by quick recovery. Policy responses could include zero rates and targeted fiscal stimulus. This scenario could see further markets falls – potentially up to 10% or so – but a bounce-back by the year’s end.
3. Milder outbreak – containment measures and the northern hemisphere Spring curtail the spread. This could see a short-term slow-down with rate cuts and limited fiscal stimulus. The market may already have seen its lows if this is the case, with a good chance of a 10-20% bounce.
4. Quick resolution – a medical breakthrough could see economic acceleration, a reversal in rate cuts, bonds falling sharply and a 20%+ rally in equities. Like the negative extreme, we see this as a low probability outcome.

Recommended next steps:

In the event that scenarios 1 and 2 occur, it is prudent to review your portfolio to weather continuing volatility. 

Opportunities will come:

  • Investment in strong and healthy companies that have been swept up in the broader market downturn, but otherwise demonstrate positive business growth are likely to hold their own over the long term. There is opportunity to buy shares that are likely to bounce back quickly following a containment of COVID-19.
  • Governments are bracing for further economic stress, and will inject stimulus to help companies and economies. There could be opportunities in companies that receive government fiscal support.

Be cautious:

  • The situation between Russia and Saudi Arabia indicates that the energy industry is in for further turmoil.
  • Companies in consumer discretionary industries are likely to feel more stress in the coming months.
  • Market volatility like this also exposes vulnerable companies, increasing the necessity for intimate knowledge of the financial performance of the companies you invest in. As Warren Buffet once said – ‘It’s only when the tide goes out that you learn who’s been swimming naked’.

Summary:

  • The Australian economy is still recovering from a difficult summer period, and this naturally has an emotional impact, and can lead to higher anxiety levels.
  • When it comes to financial security, our best decisions are made when we are calm and measured.
  • Gather professional advice and keep focused.
  • This advice is general only, and cannot consider your personal situation. If you have concerns, or wish to act on opportunities, please contact us to discuss your personal situation.
  • We will remain vigilant in keeping our clients up to date with continuing market updates as this situation evolves.

Important information
This document contains general advice. It does not take account of your objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision. This document has been prepared by Count Financial Limited ABN 19 001 974 625, AFSL 227232, (Count) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Count Wealth Accountants® is the business name of Count. Count advisers are authorised representatives of Count. Information in this document is based on current regulatory requirements and laws as at 31 October 2018, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Count, its related entities, agents and employees for any loss arising from reliance on this document.

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