News

It’s been another positive week for Australia in the fight against coronavirus, with more restrictions on businesses and social movements being eased, sporting codes preparing to recommence their seasons, and even talk about a resumption of international travel between Australia and New Zealand.

Despite this, financial markets have begun the month on a volatile note, with the ASX recording a 5% fall on Friday 1st May. After such a big rally in April (the ASX was up almost 10% for the month), a pullback of this nature was to be expected, with many respected commentators stating that they think equity markets will re-test the lows seen in late March in the months ahead.

This would make sense to us, as whilst things do look like they are getting better in the fight against coronavirus, they’re almost certainly getting worse in the economy.  The latest data from the Australian Bureau of Statistics (seen in the chart below) suggests the number of jobs, and total wages paid in Australia dropped by 7.5% and 8.2% respectively in the month to mid-April.

Changes in employee jobs and total wages indexed to the week ending 14 March 2020

Source: Australian Bureau of Statistics

Given this backdrop, it is impossible to see how aggregate demand in the economy can hold up, with even the Federal Treasurer stating that the economy is bleeding to the tune of $4 billion a week whilst we remain in quasi-lockdown, with economic output likely to drop 10% this quarter.

For as long as this continues, companies are almost certain to see a massive hit to their sales figures, and to their profits, which can’t help but weight on share prices going forward.

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It’s been another positive week on the coronavirus front, with rates of infection in Australia continuing to slow, whilst financial markets (apart from oil) have been calm, at least relative to the extreme volatility seen in March of this year.

Given this backdrop, we thought it appropriate to use this week’s “In the Loupe” to touch on three key areas of relevance to our readers at Australian Diamond Portfolio.

• The shocks to the Australian economy that continue to build.
• Why household frugality is the new normal.
• Why high levels of equity market concentration are a growing risk for investors.

These developments are all linked, and combined will continue to encourage investors to allocate part of their portfolio to tangible assets like pink diamonds.

So far this year, pink diamonds have again shown their ability to hold their value, despite the unprecedented challenges we face. As you’ll see below, we don’t expect that to change anytime soon, with the role they can play both protecting and enhancing wealth becoming clearer by the day.

Australian Economic Shock to Build

Whilst the news regarding the slowing spread of coronavirus continues to get better, with some restrictions on movement and socialising lifted in certain states, the news about the economy only continues to deteriorate.

Modelling by Ernst and Young suggests the lockdown we are currently in could cost up to $400bn over a six-month period should most restrictions remain in place, a number that is closer to 20% of our total economic output.

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Stock markets have remained relatively calm over the last week, with the spread of coronavirus continuing to slow, and some countries beginning to talk about easing restrictions on human movement in the foreseeable future.

This includes Australia, where the government have suggested that some services, including elective surgeries, will be allowed again, with the ban on these set to be lifted after the ANZAC day long weekend.

Whilst we welcome any and all signs that life is heading back to normal, we’d note that from a health perspective, and from a financial perspective in particular, we are far from out of the woods, with investors likely to face continued uncertainty for the foreseeable future.

If you need any further evidence of how far out of whack things are in the real economy right now, consider that this week, the price of oil fell below zero. We don’t wish to sound alarmist, but we can’t but help think we face some very difficult years ahead of us if oil, the most important commodity powering the industrialised economy is literally worthless.

Make no mistake, there will not be a quick return to normality from the economic damage caused by coronavirus, with the economy likely to get substantially worse in the coming months. Central banks can try and print our way out of this crisis (and they are trying, as you can see in the chart below which plots the exploding rate of money printing), but it will not work.

12m rolling change in G10 Central Banks’ Balance Sheet (USD billions)

Sources: Deutsche Bank, Bloomberg Finance L.P, Datastream.

Instead, what all of this currency printing will do is encourage investors to put their money into hard assets, which will be a tailwind for unique asset classes like pink diamonds for years to come.

The importance of specialisation

With the economy and financial markets going through a period of unprecedented volatility, it should be no surprise that some luxury items are struggling to find the same level of buyers, with people closing their wallets.

Pink diamonds have of course been totally unaffected by this sell off, with prices slightly rising in the last year in USD terms, and up significantly in AUD terms.

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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

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.

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Over the last few days, we’ve seen some encouraging news in the battle to control coronavirus, with the number of people getting diagnosed with the disease continuing to increase, but a slower pace than previously.

Whilst this is a good sign, it’s far too early to think the worst is behind us, especially as Australia is still to head into winter, whilst in some countries like the USA and Spain, it appears to be exploding.

Domestically, the impact the coronavirus is having on the economy has been growing by the day and is evident in the 25% decrease we’ve seen in the Australian equity market since late February, as well as a plunging Australian dollar, which is again trading at just USD $0.60.

Both of those factors should serve as important reminders as to why investors should look at pink diamonds, as they have a very solid track record of maintaining value in periods of equity market stress, and they of course benefit from any fall in the value of the Australian dollar.

How about housing?

One other market that hasn’t been getting as much attention in recent weeks, but which we think poses just as much threat to the wealth of many Australians going forward is the Australian housing market.

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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.

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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”.

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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.

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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.

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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.

1. Avoid gathering a ‘long tail’ of small companies
2. Avoid building the unmanageable ‘monster portfolio’ of 80 stocks
3. Don’t forget to sell when the time is right
4. Diversify by asset class, not just by stocks
5. Deploy your cash; it has a negative real return in term deposits
6. Go global. Aussie stocks are just part of the market
7. Don’t just focus on income
8. Focus on growth (missing out on this is ‘the biggest mistake in Australia’)
9. Avoid trading. Take a long-term approach

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