16 Apr

Diamonds Are Looking Super

We hope that you and your loved ones were able to enjoy a relaxing Easter weekend, even if celebrations were obviously more modest than prior years due to the restrictions in place to mitigate the spread of coronavirus.

In Australia, the speed at which the virus is spreading continues to slow, with some arguing that we may soon see some easing of the restrictions on our personal freedoms which we’ve all become accustomed to in the past few weeks.

The relative ‘good news’ that we’ve seen in the past few days as regards the slowing spread of coronavirus is also impacting financial markets, with the US share market recording one of its strongest weeks on record leading into the Easter break.

We have two words of warning for anyone getting too excited by this, thinking that it means we are heading back into a roaring bull market for shares.

The first of those is a look back in time, with market history telling us that essentially all of the “best weeks” on record for share markets have taken place during major bear markets, where over the medium-term, investors lose lots of money. This can be seen in the chart below.

 

Dow Jones Industrial Average, best weeks on record

Dow Jones Industrial Average, best weeks on record

Source: Pete Wargent

Note all those amazing weeks during 1931 and 1932. That’s the middle of the Great Depression, with stocks falling about 90% peak to trough. If what we are going through now is a repeat, then you don’t want to own shares.

Instead you want hard tangible assets in your portfolio, which protect and grow capital in such environments.

The second reason we wouldn’t get too excited by the latest market bounce is the underlying economic reality. In Australia, Roy Morgan research suggests the unemployment and underemployment rate combined has already topped 25%. That’s one in four Australians either out of work, or not getting enough of it.

It is just as bad in America, where a staggering 16 million Americans (about 12% of the full-time workforce) have lost their jobs in the last three weeks.

Again, this reinforces the need to hold hard assets in a portfolio, rather than relying on the stock market to continue to defy gravity, with economic fundamentals deteriorating at the fastest pace in 100 years.

How about superannuation?

Australian investors should also be paying particular attention to their superannuation funds right now, with most funds likely to report truly horrible performance figures for the March quarter.

Analysis from superannuation research firm Chant West suggests the decline might be around 13% for ‘growth funds’ which are the types of funds that most Australians have their money invested in.

Pink diamonds on the other hand are on track to deliver another stable quarter, with our clients in Australia also benefitting from the further decline in the Australian dollar that we have seen this year.

Compounding the concern for superannuation going forward is the fact that many of the funds may face liquidity squeezes, as the government’s decision to allow Australian’s to withdraw up to $20,000 from their superannuation fund may see some funds have to sell down assets to fund redemptions.

This could be a particular problem for funds with heavy exposure to illiquid assets like private equity, unlisted infrastructure and property, as these assets are hard to sell in good times, and impossible to sell (at a reasonable price) in hard times.

Added to that is the concern over what some of these assets are really worth, as they aren’t subject to daily market pricing, and there aren’t widely published indexes which track performance, like the FCRF does for coloured diamonds.

As an example, consider the chart below, which shows the performance of the HostPlus property sector option (pink line) vs the performance of the S&P/ASX 300 A-REIT Index (black line). For reference, HostPlus is a major Australian superannuation fund, with a heavy allocation to unlisted assets.

 

S&P/ASX 300 A-REIT Index vs Hostplus Property Option

S&P/ASX 300 A-REIT Index vs Hostplus Property Option

Source: ASX, Stockspot, Hostplus website as of 23 March 2020

Note how the HostPlus option has risen very marginally, whereas the S&P /ASX 300 A-REIT index dropped by almost 45%. That’s very strange, given both investment options are exposed to the same asset class, namely property.

Combine this uncertainty regarding valuations with the potential for mass liquidations and you can see why there are some calling for the RBA to bail out the superannuation industry.

From our perspective, it makes us very happy that we have a SMSF, for two key reasons. The first of those is that by having a SMSF, we have the flexibility to invest in whatever assets we see fit, including pink diamonds.  Secondly, by having a SMSF it also means we are in full legal control of our portfolio, and the investments we own in it are ours alone.

Given the risks in financial markets and ongoing economic uncertainty, those are powerful advantages, relative to having your money comingled with tens if not hundreds of thousands of others, with little to no control over how it is invested.

Argyle still on track to close this year

One industry that is doing its best to maintain output despite the threat of coronavirus is the mining industry, with Australia a major producer of iron ore, coal, gold and the like.

This includes the Argyle Diamond Mine, with the WA government providing clearance for the Rio Tinto operated mine to continue production levels, according to this article. As such, the mine is still on track to close by the end of this year.

This supply reduction, coupled with the continued rise in investment demand can only help impact prices in the months and years to come, with pink diamonds remaining a go-to option for astute investors in Australia and worldwide.

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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