Unprecedented times drive an extraordinary government response

The US and Australian governments are throwing everything they can at the current economic crisis. Even then, they know it won’t be enough. It was only a short time ago that the global economy was on track for modest if not unspectacular growth, however, that prospect is now all but forgotten, with a recession all but assured.

The Coronavirus pandemic has caught everyone off guard. From governments to economists, analysts, investors, business owners, medical professionals, employees – no one expected such a black swan event would bring the world and the global economy to a sudden halt.

However, as governments race to address the impact of the impending recession, we are witnessing an unprecedented level of economic support being rolled out to try soften the blow for businesses and individuals.

Locally, in an attempt to mitigate the downside impact to employment and GDP, the Morrison government has laid out plans to effectively put businesses into ‘hibernation’. A large part of this plan relies on affording SMEs access to credit, rental deferrals and wage subsidies.

SMEs will have access to a $20 billion loan scheme enabling borrowers to access as much as $250,000 for a fixed term of three years. In addition, the JobKeeper program will subsidise an employee’s wage by $1500 per fortnight, mitigating the extent of unemployment.

In terms of employees affected by the crisis, laid-off workers will have access to payments through the JobSeeker program, and may also be in a position to access early superannuation withdrawals.

As part of a cash stimulus program, individuals receiving government support may be eligible for $550 income supplement payments. Furthermore, up to 6.5 million Australians, including pensioners, will receive two separate payments of $750.

Homeowners and renters will also have support in the form of deferred mortgage repayments and a stay on evictions for at least six months.

All the while, the RBA has slashed interest rates, increased funding to lenders and introduced quantitative easing for the first time, expanding the nation’s monetary supply.

Meanwhile, the US government is embarking on its largest-ever stimulus plan, committing at least US$2.2 trillion to fight the economic impact of the pandemic.

In the meantime, the Federal Reserve has ‘upsized’ its asset purchasing program, indicating there will be no limit to its balance sheet expansion. It will also expand purchases to corporate bonds and commercial mortgage-backed securities, while providing banks with more affordable access to short-term funding. The issuance of asset-backed securities will be underpinned by various types of loans.

Elsewhere, around US$350 billion has been set aside for loans to small businesses and US$500 billion will be provided to companies deemed “critical” to US national security.

Cash stimulus payments include US$1200 cheques for individuals earning up to US$75,000, while laid off workers will receive four months’ worth of full pay and unemployment payments of US$600 per week.

These collective efforts are not a ‘solution’ to the economic crisis, but they could still achieve their goal - to ultimately soften the extent and impact of a recession. Unprecedented times call for an extraordinary response. These measures certainly are extraordinary. Whether they are effective, however, remains to be seen.


International Growth Portfolio

The portfolio gained 5.8% across March, representing another month of significant outperformance relative to the US market. In contrast, the S&P 500 was down by 12.5%.

For the third month in a row, our currency strategy played a vital role in helping us deliver a strong performance. The USD/AUD increased from 1.5363 to 1.6294 by the end of the month, although at one stage it surpassed 1.80, which provided us with an opportunity to close half of our positions at the high.

Forex movements delivered the bulk of gains for the portfolio, with our transition out of equities and into USD-cash proving a lucrative trade. The decision to subsequently sell out of USD-cash also turned out to be a perfectly executed move, with the Australian dollar since rallying about 10% from its low.

Having moved away from holding direct equities, the other key part of our investment strategy amidst the volatility was to sell put options.

Mid-month we sold put options across the likes of Apple (APPL), Advanced Micro Devices (AMD), Bank of America (BAC), CME Group (CME), Microsoft (MSFT), Nike (NKE), Visa (V) and Zillow Group (ZG). This move helped add modest gains to the portfolio NAV on the back of the option premium we received, as well as some gains picked up when we were obliged to purchase certain stocks at their respective ‘strike’ price.

There was also some minor activity at the end of the month when we sold a new series of short-dated put options against Apple, Advanced Micro Devices, Bank of America, CME Group and Roku (ROKU).