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).
Given we have managed to largely avoid the heightened volatility of the last month, we retain our view that there are opportunities to gain market exposure through derivative investment strategies.
It is our opinion that while the stimulus efforts being made by the US central bank and government have the potential to soften the blow on the economy, the health and economic situation in the US will only worsen in the near-term. This leads us to believe that further market weakness is likely to materialise and facilitate better opportunities for entry at a later date.
Australian Yield Portfolio
The portfolio declined 26.9% throughout March.
Numerous companies paid dividends during the month, including JB Hi-Fi (JBH), Baby Bunting Group (BBN), IOOF Holdings (IFL), ResMed (RMD), Woodside Petroleum (WPL), BHP (BHP), Challenger (CGF), Medibank Private (MPL) and Telstra (TLS). These dividend proceeds represented approximately 0.7% of the portfolio NAV at the end of February, excluding dividend accruals.
Given the broad-based market sell-off, we made a decision at the end of the month to sell out of a few equity positions within the portfolio.
While this is not aligned with the normal investment strategy of the Yield Portfolio, we felt the current market volatility required us to make some adjustments to improve portfolio stability. Therefore, while cash represented approximately 30% of the portfolio NAV at the end of March, we have since redeployed these funds into hybrid products offering more stability.
In terms of trading activity, we reduced our exposure in A2 Milk (A2M), ANZ (ANZ), Bank of Queensland (BOQ), Iluka (ILU), NAB (NAB) and Stockland Corporation (SGP).
In addition, we also exited our holdings in Afterpay (APT), Corporate Travel Management (CTD), Magellan Financial Group (MFG), Macquarie Group (MQG) and Resmed (RMD).
Our rationale driving these movements is predominantly related to the areas where we see economic weakness arising from the current global downturn. In particular, sectors such as financials and consumer discretionary are those we consider most vulnerable on account of the longer-term implications for those companies.
Realised losses represented 8.7% of NAV from the end of February, with some minor gains delivered via a put option sold against Commonwealth Bank (CBA). Unrealised losses currently amount to 26.4% of February’s closing NAV.
Although the market’s impact on the performance of the portfolio has required us to adjust our investment strategy, we feel the changes are more oriented towards seeing us through the current bout of volatility and better protecting capital. Furthermore, our rotation into hybrid products ensures that we retain our focus on generating income.
Hub 24 Superannuation Portfolio's
The portfolio fell 10.8% across March, however, this represented a high level of outperformance as the broader market dropped 20.6%.
Absolute performance was hit by strong volatility but we mitigated this as we repositioned the portfolio early in the month towards cash. By the end of the month, cash represented 39.25% of the portfolio’s assets.
Our rationale for this portfolio rebalance centred on concerns around exposure to the banks and consumer discretionary stocks. As a result, we made early moves to reduce or exit our holdings in the likes of Westpac (WBC), Commonwealth Bank (CBA), Macquarie Group (MQG), Aristocrat Leisure (ALL) and Afterpay (APT). We also switched from Woolworths (WOW) to Coles (COL) on account of less exposure to discretionary spending from the former’s pub and hotels division.
Another key decision we made saw us drastically reduce our exposure to ETFs and LITs, including MFF Capital Investments (MFF), Magellan Global Trust (MGG) and Magellan High Conviction Trust (MHH). The latter we reacquired at a steep discount since the Trust was and still is trading at a significant discount to its NTA. We intend to buy further units on any price weakness.
Where we conducted buying activity, we exercised discretion with the stocks that we were willing to purchase. This meant that we avoided exposure to energy and oil positions and opted for healthcare stocks, more mature businesses, as well as price-depressed shorter-date hybrids like ANZPD and CBAPE. The severity of the market sell-down also afforded us an opportunity to pick up assets that we deemed ‘oversold’, such as Credit Corp Group (CCP) and Tyro Payments (TYR).
In saying the above, we re-entered smaller positions in some of the stocks that we earlier exited, albeit at a significant discount. Aristocrat Leisure and Afterpay were two of these investments, where we picked up stock at a price that was approximately 30% lower than the value we sold at. Another example was Macquarie Group.
From here, we expect that the health and economic situation in the US will deteriorate further. Accordingly, we have positioned ourselves away from this, opting to stay overweight in cash as the market assesses the significant stimulus efforts being made. We believe market weakness in the near-term will provide us with an opportunity to accumulate stocks at lower prices.
The portfolio declined 16.2% during March.
While performance lagged the Balanced Portfolio, this was due to higher weightings assigned towards growth and risk assets. During a downturn, these assets will typically be hit harder, however, it is worth noting that the Growth Portfolio still performed ahead of the broader market.
In this respect, the increased emphasis on growth played out in the growth holdings we elected to retain through the month. For example, while we exited all exposure to Aristocrat Leisure (ALL) in the Balanced Portfolio at the beginning of the month, here we opted to maintain some exposure.
Another stock that we maintained our position was Xero (XRO). We believe the company holds various competitive advantages as an industry leader due to its core product, its brand, data analytics, barriers to entry, as well as the scale and extent of its partnerships.
Furthermore, we also held our position in Electro Optic Systems (EOS), even though the stock is one that is proving to be vulnerable to market volatility. Nonetheless, despite its sharp fall during March, we retain a positive outlook on the company’s technology. Beyond this, we also hold the view that current global events may give rise to the possibility of increasing geopolitical tension, which could lead to military action that would stoke demand for EOS’ products.
Our approach with these positions is a reflection of the increased risk tolerance that aligns with the investment strategy of the Growth Portfolio, and which traditionally supports above-average returns during conducive market conditions. It also means that there is less focus on fixed income, with fewer hybrids making up the portfolio.
We positioned the portfolio to hold slightly more cash than the Balanced Portfolio. This is in anticipation of further weakness we believe may arise from the accelerating spread of the Coronavirus through the US and the ramifications it is likely to have on global markets. At the month’s end, cash represented 46.75% of all assets in the Growth Portfolio. It is our intention to deploy funds where the market presents any compelling investments priced at what we believe would represent a risk-adjusted opportunity for growth.