The first quarter of 2020 will go down as one of the most volatile in the history of financial markets, with the growing threat of coronavirus, and the emergency steps to contain its spread causing a meltdown in equities markets and huge moves in the value of foreign currencies.
The ASX 200 in Australia lost more than 30% of its value at one point during the month and ended up down by almost 25% for the quarter, its largest quarterly fall on record. Bigger picture, the market is now back at levels first seen in 2006, as the chart below highlights.
Similar moves have also been seen in the S&P500 in the United States and other parts of the developed world, with years of gains wiped out in a matter of months.
The speed of the collapse has caught nearly everyone by surprise and has led to a notable surge in the number of investors looking to diversify and protect their wealth with hard tangible assets.
The coronavirus situation in Australia continues to deteriorate, with businesses being forced to close and hundreds of thousands of Australians looking like they will lose their jobs in the months ahead.
It is a trying time for the entire community, and we offer our heartfelt support to you and your family and friends in the months ahead. We have no doubt that we will get through this as a nation and hopefully emerge stronger and more resilient than ever.
In the meantime, from a financial perspective, it’s absolutely critical that investors position their portfolio so they:
Minimise exposure to highly risky investments that will suffer in the current climate
Increase exposure to assets best suited to outperform in this market
In order to do that, it’s important to stay on top of economic developments, both here and around the world. And whilst it gives us no pleasure to say it, the truth is that the economic data we are seeing is incredibly troubling, with results that are in many cases worse than those seen during the Global Financial Crisis.
In Australia we’ve seen early evidence of the impact of coronavirus in the release of Commonwealth Bank’s composite manufacturing and services index. This index attempts to measure activity in these two crucial industries, with any reading above 50 indicating that activity is increasing, and any reading below 50 suggesting activity is declining.
The chart below highlights the latest reading, which plunged to just over 40 in its most recent update, the lowest level on record.
CBA Composite PMI (covering manufacturing and services)
Source: IHS Markit/CBA
The decline was particularly acute in the services industry (which is a far larger employer), with CBA economist Michael Blythe noting that; “The sharp deterioration in PMI readings during March underlines the increasing impact of the coronavirus on the Australian economy. The services sector is being hit hard by the cancellation of events, general fears about social interaction and a very sharp decline in offshore demand as travel restrictions bite. The manufacturing sector is faring a little better. But the leading indicators are flashing warning signs. The deterioration in supplier delivery times is accelerating, highlighting the disruption to supply chains. And the lower Aussie dollar is pushing input prices up at a rapid rate”.
On behalf of myself and everybody at Australian Diamond Portfolio, we wanted to start this week’s ‘In the Loupe’ by wishing you, your family and your friends all the very best through these trying times.
The coronavirus, the risk of its spread, and the economic fall out that it will cause in the months ahead will test our resolve as human beings, and now more than ever, we need to support each other, in whichever way we can.
That said, our job with these regular articles is to update our clients on the latest developments in financial markets and the economy. And whilst we’ve mentioned the impact on coronavirus in previous emails, it feels like this is the week that the western world has really woken up to the threat.
In Europe we have seen border closures, and total lockdowns in certain areas, whilst even here in Australia we are seeing restrictions on entry, requirements for returning Australians and travellers to self-isolate, and bans on large gatherings of people.
These restrictions are likely to be ramped up in the coming weeks, as governments make a last-ditch attempt to limit the spread of the virus.
Make no mistake, managing the risk posed by the coronavirus is shaping up as a 1 in 100-year event that we will all remember for the rest of our lives.
Markets were battered again this week, as the economic impact of a still spreading coronavirus combined with a staggering decision from Saudi Arabia to increase oil production.
The coronavirus situation has gone from bad to worse globally, with all of Italy effectively in lockdown, whilst other countries in Europe step up containment measures.
Whilst the total numbers of cases in Australia remains modest, it continues to spread by the day, with some schools, nursing homes and childcare centres closed in an effort to limit its spread.
It’s impact on the psyche of Australian consumers has already been profound, with the latest consumer confidence figures falling 4% last week, with people’s assessment of economic conditions falling nearly 25% in the last two weeks. These declines are akin to the declines seen at the height of the global financial crisis just over ten years ago.
The spread of coronavirus alone was causing no end of distress to financial markets, but with the oil price crash (which could lead to a lot of defaults amongst highly leveraged energy producers) it seems investors just gave up on Monday, with the following headline from the Wall Street Journal summing up the global mood.
Australian markets have felt the full force of the sell-off, with the ASX 200 down by almost 20%, not only wiping out this year’s gains, but all of the capital appreciation seen in 2019 as well, when stock market bulls were celebrating new highs.
Over the last week, we have seen extreme volatility in financial markets, with the Australian equity market suffering its largest one week fall in over a decade. In America, the S&P 500 fell by over 10% in just 6 trading days, the speediest decline. of that magnitude on record.
Markets have calmed for now, but last week’s movements are a reminder of the importance of protecting wealth, and making sure your portfolio is appropriately positioned for the times we live in.
To that end, we were pleasantly surprised to come across a great ‘investment checklist’, which contained nine points for improving the performance of one’s investment portfolio.
The checklist came to us via the Australian Shareholders Association, an organisation that we have worked with in the past in order to spread the word about the investment case for pink diamonds, and how investors should go about incorporating them into their portfolio.
The full checklist is as follows.
Avoid gathering a ‘long tail’ of small companies
Avoid building the unmanageable ‘monster portfolio’ of 80 stocks
Don’t forget to sell when the time is right
Diversify by asset class, not just by stocks
Deploy your cash; it has a negative real return in term deposits
Go global. Aussie stocks are just part of the market
Don’t just focus on income
Focus on growth (missing out on this is ‘the biggest mistake in Australia’)
It has been a week of cascading losses on global equity markets, as fears over the spread of coronavirus continue to spread. Far from being contained as we all hoped, it looks to have spread, with the number of cases seen globally rising by the day.
The impact on the economy will be meaningful, with United Airlines withdrawing their forecasts for 2020 due to the impact of the virus. They have reported a 75% decline in near term demand for flights to the Pacific, and essentially a 100% fall in demand for flights to China.
Markets, which at first didn’t seem too concerned about the impact of the virus on the global economy, are beginning to wake up, and the result isn’t pretty.
This can be seen in the table below, which shows the performance of a range of equity markets around the globe. As you can see, it is an unrelenting sea of red, with all of them falling meaningfully.
Losses were particularly acute in Europe, no surprise given a number of cases of coronavirus have been identified in Italy, with fears that it will spread across the continent.
In this week’s edition of ‘In the Loupe’, we focus on the latest performance figures released by the Fancy Colour Research Foundation (FCRF), who in early February of this year published their end 2019 Fancy Coloured Diamond Index (FCDI) results. The FCDI tracks changes in the buying prices of various categories of pink, yellow, and blue coloured diamonds globally.
Pink and blue diamonds held their ground across 2019, finishing the year with slight gains. On a relative basis, they strongly outperformed yellow diamonds, and the FCDI more broadly.
The FCDI as a whole fell by -0.6% in Q4 2019, with results for the full calendar year showing a decline of -1.4% in 2019. Whilst this is obviously well short of the long-run price gains investors have come to expect from coloured diamonds, it is worth pointing out that the overall decline was driven by a more than 5% fall in price of yellow diamonds.
Within the pink diamond subset, the clear outperformer was Fancy Vivid Pinks and Purplish Pinks, with these stones appreciating by 4.4% in 2019, continuing a strong run of gains that has seen pink diamonds as a whole rise by 116% over the last decade.
The increase in the value of pink diamonds is the largest amongst all categories of coloured diamonds. For comparison sake, it is worth pointing out that over the last decade, blue diamonds increased by 81%, whilst yellow diamonds were only up 21%.
Long-run returns are even more impressive, as can be seen in the chart below, which plots the performance of all three categories of coloured diamond (as well as the overall FCDI, which is the grey line) over the past 15 years to the end of 2019.
All sizes and intensities in Pink, Blue and Yellow
Source: Fancy Colour Research Foundation
As you can see, total returns generated by pink diamonds since the start of 2005 are approaching 350%.
Regular readers of In the Loupe will be aware of the wealth generating potential pink diamonds offer, and why they are best seen as a long-term investment, with a five to ten-year investment time horizon at a minimum.
We are often asked what kind of returns investors can expect in this space. This will obviously be influenced by multiple factors, including the size of the investment a person makes, the timeframe they hold for, and the type of pink diamond or diamonds they end up investing in.
The following chart plots the value of a pink diamond portfolio both now and in 2030, based on a range of initial investments, and using a forecast annual return of 11.94%.
This return is in line with the average historical USD pink diamond price for the three main categories of pink diamonds we source for clients at Australian Diamond Portfolio.
We’ve used three initial investment figures, starting at AUD $25,000 through to $100,000. $50,000 represents a standard investment level for Australian Diamond Portfolio clients.
Potential Investment Growth over 10 years for Pink Diamonds
The big news of the week in Australia was the decision by the Reserve Bank of Australia (RBA) to hold interest rates steady yesterday, with the cash rate still sitting at 0.75%.
Throughout January, there was some speculation that the RBA would cut rates this week, bringing them to a new all-time low of just 0.50%, with fears of the economic contagion caused by the coronavirus outbreak one of the factors supporting a rate cut.
Some commentators even suggested the RBA should “shock the market” and cut rates by 0.50% or even 0.75%, bringing interest rates all the way to zero, in a clear sign that the central bank would do all it could to push the value of our currency lower, in the hope it would stimulate the economy.
Thankfully, saner heads have prevailed for now (and we really must stress the “for now” part), with stronger than expected employment data in late January and a pick-up in house prices enough to see the RBA stay put.
Make no mistake though, interest rate cuts are coming in 2020, with expectations (seen below in this chart from the ASX), suggesting the market has now fully priced in a rate cut by May of this year, with the potential for further easing seen in the second half of 2020.
ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve As at market close on 3rd February 2020
Source: ASX. ASX disclaimer: This document provides general information and is indicative only. It is not investment advice and readers should seek their own professional advice in assessing the effects of the information in their circumstances. ASX limited and its related corporations accept no responsibility for errors or omissions, including negligence , or for any damage loss or claim arising from reliance on the information. Futures and options trading involves he potential for both profits and losses and only licensed brokers and advisors can advise on the risk.