11 Mar

Diamonds Rock Solid as Markets Enter Freefall

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.

Stocks fall more than 7% in Dow's worst day since 2008 - Wall Street Journal

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.

On a global basis, the sharp correction that we have seen in equity markets since mid-February is the fastest on record. As per the following chart, it has typically taken 155 trading days (just over 30 weeks) for markets to fall 20% in significant pullbacks.


All Dow Drawdowns Greater Than 20%

All Dow Drawdowns Greater Than 20%

Source: Bloomberg

This time around the market has fallen by 19% in less than 20 trading sessions.

Make no mistake, this much pain, felt this quickly, will have a lasting impact on equity market investors, and their willingness to put more money into the share market.

Central banks can and will pump more liquidity into the market, and they will begin new money printing programmes, but this is more likely to find its way into tangible hard assets, as investors seek to diversify and protect wealth.

Pink diamonds will be one of the asset classes that benefit from these trends, as more and more investors appreciate the capital stability, diversification benefits and growth potential that they offer.

Australia in Recession

For some time now, we have been warning about the poor outlook for the Australian economy, with well-founded concerns regarding high household debts, low to negative real wage growth, and rising costs for essential items like healthcare, education and utilities.

This week, well respected Westpac Economist Bill Evans declared that Australia is likely already in, or will soon enter a recession, something that we haven’t seen in almost thirty years.

It is worth noting that Evans thinks this will only be temporary, with the economist expecting the recession to last just six months, with growth likely to accelerate in the second half of 2020.

We think that may end up being too optimistic, with the headwinds facing the Australian economy building by the day. The pain being felt in our tourism and education sectors won’t end anytime soon, whilst our building industry is still suffering excessive levels of construction seen in the past few years. Already stretched households will also bunker down, and limit spending, even if the health impacts of coronavirus remain modest.

Our view is bolstered by the fact that the market now expects another RBA rate cut by May 2020 at the latest, which would bring interest rates to just 0.25% before the end of the financial year.

Combine this with the ever louder calls for the RBA to print money and it is very clear that as we have said for years now, cash in the bank is dying. Investors focused on building wealth need to rotate into tangible assets.

No Returns Until 2050

Whilst most attention has been focused on crashing equity markets, the bigger news has been in bond markets, with the yields on government bonds crashing to new all-time lows all over the world.

In the United States, the US 30-year Treasury bond yields just 1.09%. If that sounds bad (and it does), then consider that “return” of 1.09% is before inflation, which over the last thirty years has increased by 97.4%.

If inflation rates are repeated over the next thirty years, it basically means that you need your money to double over that time period just to tread water in terms of maintaining your wealth.

Instead, anyone putting $100,000 into a US 30-year Treasury bond in 2020 will get just $138,435 in 2050, based on the current yield. It’s a terrible result, with anyone investing in these securities guaranteeing that they’ll end up worse off financially, if they hold them through to maturity.

No wonder the demand for alternative assets, including pink diamonds, continues to soar.

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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