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.
Beyond the stock market, and it is also clear that the spread of coronavirus has led to a growing economic calamity worldwide, evidenced in the United States by the more than 3 million people that filed jobless claims in the week ending Friday 27th March.
In Australia, the federal government has announced an economic support package of well over $100 billion (all of which will get added to the national tab for taxpayers to deal with in future) with up to 6 million Australians expected to claim some sort of emergency support from the government in the months to come.
Whilst it is not entirely coronavirus related, Q1 2020 has also seen a record plunge in the price of oil, best evidenced in the below chart, which plots quarterly returns for crude oil, going all the way back to the start of the 1990s.
Quarterly Returns for Crude Oil
At approximately 65%, this is by far the worst oil plunge on record, with this move wreaking havoc on shale oil producers in the United States, many of whom are highly leveraged and likely to enter bankruptcy if current low prices persist.
Even gold has been volatile this quarter, with the yellow metal rising toward USD $1700oz at one point, before plunging almost 15% to just above USD $1450oz, as investors liquidated almost anything they could during the worst of the financial market panic we saw in March.
Against this, pink diamonds have again offered stability and diversification, two attractive investment features that will only become more relevant in the months and years to come.
Consumer Confidence Crashing
Despite the hundreds of billions of dollars of stimulus that have been promised by federal and state governments, it is unlikely the Australian economy will quickly bounce back, even after the health crisis is over, and we are free to again enjoy our freedoms as Australian citizens.
Part of the reason for that is the epic crash in consumer confidence, which is now at its lowest level ever (worse than the early 90’s recession) and will likely take years to recover from.
The chart below, from economist Callam Pickering highlights the plunge, with current levels of consumer confidence now a stunning 42% below their long-term average.
Australian Consumer Confidence
ANZ Roy Morgan measure, monthly average, average 1990 – 2020 = 100
As you can see, it took years back in the early 1990s (last time confidence levels were this low) for confidence levels to return to their long-run average. Back then, interest rates were much higher, meaning the RBA could do more to stimulate the economy. Back then, household debt levels were much lower, meaning it was easier to take on debt to buy a house or increase consumption. Back then, China was emerging into an economic superpower, which required huge volumes of Australian mineral exports, as well as strong demand for housing, tourism and education.
None of this can be taken for granted going forward, which is why the recovery from this event is going to be that much harder, and likely take that much longer.
For as long as these dynamics are in place, it is likely that we’ll see traditional assets like equities and real estate suffer, and alternative hard assets like pink diamonds flourish.
Pink Diamonds Stable
Whilst it is too early to release performance figures for Q1 2020, we know that demand for pink diamonds has remained solid, with Australian Diamond Portfolio having one of its busiest quarters on record.
This has not been a surprise to us, as the stability of diamond prices during periods of market turmoil, plus their potential to deliver strong long-term returns in their own right are increasingly attractive to astute investors.
Our clients will also have benefitted from a decline in the value of the Australian dollar, which has fallen by more than 10% versus the United States dollar in the first three months of 2020. The potential for further weakness is evident, especially as the Reserve Bank of Australia (RBA) has now joined its global counterparts in printing money to support the local financial system.
That money printing, combined with a new record low in the cash rate of just 0.25%, will also help support pink diamond demand, and prices, for years to come, with central banks and policy makers realising there is no easy way out from the monetary black hole we have entered.
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.