18 Mar

Coronavirus Will Push Investors Toward Hard Assets

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.

How bad will the economic decline be?

Economic forecasters are drastically downgrading their estimates for economic activity, with a global recession a near certainty in 2020. Goldman Sachs caused quite a few headlines when they stated that US GDP will fall by 5% in the second quarter of 2020, though this seems entirely feasible based on the economic indicators that we are seeing.

These include things like restaurant table bookings, with numbers plunging by over 50% in some cases in cities like New York, Boston and San Francisco.

In Australia, we’ve seen QANTAS announce that they’ll be reducing their international flights by up to 90% for the next two months, whilst at the small to medium end of the market, some 60% of small to medium size enterprises are being negatively impacted by the coronavirus outbreak.

This is a massive increase on figures from just one month ago, when closer to 15% of businesses were saying they were affected, as you can see in the chart below.

Australian businesses affected by Coronavirus

Source: Roy Morgan

This will obviously have drastic ramifications for employed Australians, with estimates that up to 4.2 million Australian’s will suffer significant financial hardship as a result of the virus.

Little wonder the government is looking at a second economic stimulus package, with some estimates suggesting that it could be as large as $100bn.

There are also suggestions that the Reserve Bank of Australia (RBA) will launch a quantitative easing (QE) programme when they meet later this week, something we have warned will happen for some time.

The impact of this is already being seen in currency markets, with the Australian dollar last trading at USD $0.61. This is a decline of almost 15% in the last twelve months, with the potential for further AUD depreciation one of the driving factors behind the increased demand for pink diamonds that we are seeing at Australian Diamond Portfolio.

Markets will take a long time to recover

On Sunday, the Federal Reserve in the United States announced that they’d be cutting interest rates back to zero and implementing a money printing programme that could grow as large as USD 700 billion.

Rather than pushing financial markets higher, they crashed, with US and Australian equity markets recording their worst single day losses since the great stock market crash of 1987.

This is on top of the savage sell off that we’ve seen since late February 2020, with the chart below of the ASX 200 highlighting the fact that despite the rise we saw today, the share market in Australia is now back at levels seen almost 15 years ago in 2006. That is a decade and a half of no capital growth, whilst pink diamonds have gone up by over 300% in the same time period.

ASX 200

Furthermore, the crash that we have seen in the last three weeks will likely take years to recover from, with the market now needing to rise about 40% just to get back to the levels seen in early 2020.

Given the deteriorating economic outlook, and how expensive the stock market is based on well-known valuation metrics, this is incredibly unlikely, unless central banks the world over decide to print money like there is no tomorrow.

That could happen, but if it does, whilst it will support equities, it will support hard tangible assets like pink diamonds even more.

Speak to Australian Diamond Portfolio

If the recent volatility in financial markets has caused you some concern, and you are interested in protecting and growing your wealth through an investment in pink diamonds, then the team at Australian Diamond Portfolio would be happy to assist.

As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and look forward to any questions or comments you may have.


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