Is it time to buy? I’ve been asked that question many times this week and have asked it of several fund managers. The main response: it’s too soon to tell.
Fence-sitting provides little solace for investors watching their portfolio shrink or those panicked by unrelenting share market volatility. Nor does it help bargain hunters itching to buy aggressively, hoping for a “V-shaped” market recovery.
Truth is, it is far too soon to call a market bottom. Nobody knows for sure how this Coronavirus will play or the full havoc it will unleash on the global economy, consumer sentiment, government balance sheets, corporate earnings, dividends and share prices.
Opinions from good judges I know range from the share market massively over-reacting to a disease that is similar to the flu; to an inevitable technical recession in Australia and ongoing earnings downgrades; to a financial markets “Armageddon” where life is never the same.
What is certain is elevated share market volatility for some time. Wild daily swings in equities will continue until the market is convinced the outbreak is being contained. For me, the key metric is signs of containment in the US – by far the biggest potential domino to fall.
Sadly, we’re a long way from that because the US lagged in its early response. Its testing rates are still far too low and the ‘user-pays’ US health system makes it harder for people who cannot afford to get tested or pay for treatment if needed.
I’m still optimistic that the experience of China and South Korea with COVID-19 will be repeated in Australia, parts of Europe and the United States in the next 6-10 weeks. That is, a plateauing of new cases, and business and life starting to return to normal. Then, as China’s experience shows, a noticeable pick-up in spending as consumers catch up.
That said, care is needed with China’s experience. It’s hard to trust the country’s health data, although South Korea’s similar experience supports it. Also possible is that China eased restrictions on self-isolation too soon, exposing more of its population to the virus.
Predictions about how far the Australian share market will fall are guesses, and it’s always better to focus on individual companies and valuations rather than market indices. If pushed, I’d say a possible further 10-15% downside from here, taking the fall from the peak to trough in the ASX 200 to 35-40% and broadly comparable to other defining market shocks.
It could be worse: the unique nature of this crisis makes historical comparison redundant. On Macquarie Wealth Management’s worst-case scenario, published this week, the ASX 200 could hit 3700 points. Macquarie says global equity markets are pricing in a global slowdown (5,100 target for ASX 200) but could start pricing in the worst-case scenario (global pandemic and recession), until growth in US Covid-19 cases peaks.
Using technical analysis, I’d watch for the ASX 200 to hold critical support around the 4700 level on the chart, if the bear market accelerates.
My base case is a technical recession (two negative quarters of GDP growth) in Australia, more corporate earnings downgrades, some dividend cuts (though not widespread) and ongoing elevated share market volatility. I’m not in the worst-case scenario camp, although investors must be prepared to change their view quickly, if facts change.
Buy, hold or sell?
My advice to Switzer Report readers has not changed since I first wrote about the Coronavirus three weeks ago. I said in late February that the “virus could linger longer than the market expects… and it could take many months to get back to business as usual for global industry”.
I added: “I wouldn’t be buying tourism, travel or education stocks that have been pummelled on Coronavirus concerns amid this week’s market sell off. Nor would I bargain hunt in the market just yet because the next two weeks will be crucial for news on whether Coronavirus containment is working. Better to watch and wait for signs that the virus is being contained.”
Nothing has changed materially in that view: keep most of your portfolio on the sidelines and wait until markets show signs of stabilisation. It’s better to miss the first 5-10% of the upswing than rush in too early and watch your portfolio fall by a third or more.
That said, retail investors should take advantage of this volatility by cautiously and modestly “averaging in” during savage market falls. By that, I mean allocating a small part of available cash to work in equities, provided you can tolerate possible short-term losses and high volatility.
Just as retail investors should “average down” when markets are high (lighten their portfolio), so should they “average in” (accumulate) when markets are low.
Tech appeals
As discussed in the past two editions of this Report, my preferred sector play is technology. Globally, it was the strongest-performing sector a year after the US low during the 2003 SARS crisis was reached. History shows companies quicken their uptake of new technologies after market shocks to cut costs, improve efficiencies and rethink aspect of their business.
The business model of quality software-as-a-service (SaS) companies is built for these times: recurring income; “sticky technology” that is harder to switch from once embedded in client systems; high profit margins; capital-light business models and an ability to cut back on investment and preserve capital if the global economy tanks.
That’s not to say SaS or other tech companies are immune from the crisis: sharp falls in the NASDAQ 100 show the market is pricing a global recession into tech earnings as well. But this market shock is a rare opportunity to buy high-quality tech-related companies at sharply lower prices.
I have mentioned four tech-stock candidates for portfolio watchlists in the past two editions: Xero, Altium, WiseTech Global and JB Hi-Fi (as a retail tech distributor).
I also suggested the ETFS Morningstar Global Technology Exchange Traded Fund (TECH) for active ETF exposure to the sector. TECH has fallen sharply this month.
I still like TECH and this week add Betashares NASDAQ 100 ETF (NDQ) to the portfolio watchlist. I’m using NDQ for exposure to the world’s best tech companies: Apple, Amazon, Google, Facebook, Microsoft Corp and others.
NDQ is the easiest and cheapest way to gain exposure to the world’s largest tech companies. NDQ is not purely a tech play (consumer stocks make up 23% of the index) but the 10 biggest tech names account for about half of NDQ.
Cautiously putting some cash to work in high-quality global tech stocks, when their valuations have nosedived, makes sense. Consumers will still be using iPhones, Microsoft software and searching the internet via Google long after the crisis.
Chart 1: NDQ
Source: ASX
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 17 March 2020.
