25 Mar

Testing Times Drive Hard Asset Demand

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)

CBA Composite PMI

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”.

Note that is before the economic impact of the virus really takes hold, and feeds through to higher underemployment and unemployment, all of which is certain in the months ahead, with the latest consumer confidence figures plunging well below levels seen during the worst of the GFC.

Globally the situation is just as bad, with some banks forecasting that US economic output will fall by over 20% in this quarter. These are depression like contractions, and they will put significant pressure on most asset classes like equities, as company earnings are going to suffer enormous falls.

As such, whilst some people might look at the stock market and be encouraged by the 30-40% falls we have seen, it is still incredibly risky. Stocks fell by closer to 75% in the Great Depression, and the economic situation we face today is arguably just as, if not more difficult than it was back then.

Alternative assets like pink diamonds are likely to be safer, less volatile and more profitable in the period ahead.

Demand for Hard Assets Rising

Whilst stock markets continue to crumble, the demand for hard assets is increasing. This in effect is a continuation of a trend that has been in place for many years, with the coronavirus amplifying the need for investors to diversify, protect and grow their wealth through exposure to tangible assets.

Evidence of the growing demand for hard assets is everywhere, not just in the increased demand for pink diamonds that we have seen at Australian Diamond Portfolio, but also through other hard assets like gold, which is seeing record buying in many countries.

Our expectation is that this growing demand for assets like pink diamonds will only increase in the months and years ahead, especially as central banks like the US Federal Reserve are now promising to print unlimited amounts of currency in order to support the financial system.

Last year, we wrote a special report comparing gold and diamonds, looking at their similarities, and some important differences between them. The below link will take you to that article, which is worth reading in light of the current market environment, and the growing appetite for hard assets.

Read ‘Gold or Diamonds – There’s only one best friend’

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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