Coronavirus is the latest way of making quality assets available at reasonable prices

If you ever wondered what volatile means, you’ll soon know because over the next few months, and perhaps for the rest of 2020, financial markets will be on a wild ride
13th March 2020
Tim Treadgold

If you ever wondered what volatile means, you’ll soon know because over the next few months, and perhaps for the rest of 2020, financial markets will be on a wild ride, up one day, down the next.

That might sound like stating the obvious after recent economic, political and public health events but now comes the reckoning as a tug of war develops between wounded bulls keen to sell, perhaps to cover margin loans, and bargain hunters looking for cheap buys.

Over the past week I’ve had the advantage of watching closely how the process works thanks to a well-timed (or should that be ill-timed) assignment in London where The City’s bankers and brokers have a unique view of global events.

Another advantage is age, and while that’s not always the case, it’s sometimes useful to have the benefit of having “been there, seen that” over a career of covering market booms and busts.

Age, so long as your memory is working well, means you can “join the dots”, and see how the market process works because there is a common thread in all booms and busts; people and their emotions.

In my case the boom/bust exposure started with the nickel boom of the late 1960s and into the early 70s, exciting and alarming at the same time as fortunes were made and lost by the scratch of a piece of chalk on the quotes board at the old Perth Stock Exchange.

Back then business was so brisk and security so non-existent that I had to pitch in and help process daily sales slips which were handled manually, if I were to meet the deadline for publishing the day’s trades.

In hindsight I didn’t have a clue about what was driving the market in mining and oil stocks back then, it was just a case of assuming someone else knew – and wondering why the late J.H. Laurence, then finance editor of The West Australian newspaper, kept saying it would all end in a bust.

For a few glorious months J.H. was wrong, and then suddenly he was right. Poseidon peaked at $200 a share just before the wheels fell off everything.

Other booms came and went. Oil in the 70s when there were embargoes placed on shipments out of the all-important Persian Gulf, entrepreneurs in the early 80s when some people believed that people such as the late Alan Bond and Laurie Connell had special powers to make money (they didn’t, except for themselves), and on to the Asian financial crisis of the 80s, the boom, the sub-prime boom/bust and then the China boom.

Different in some ways because there always variations in the assets being over-promoted, and the same in other ways because they all involved easy money, either debt or equity (or both), with all booms ending when investors discover they have been over-paying for sub-standard assets.

Today’s events are a re-run of the past, though somewhat encouragingly, not as bad as what we’ve seen before because the underlying financial framework is not being threatened, as it was in 2008, and the fear of a previously unknown virus will pass, once we’ve all caught it or a vaccine emerges.

Confidence that we are passing through a predictable process of correction does not mean most people will avoid being sideswiped by the steep fall in asset values. It’s the bruising which comes from suddenly feeling poorer which will keep investors away from the market – for a while.

But as the wounded bulls make their exits, it will become a little clearer that high quality assets have suddenly become available at a reasonable price.

My experience is that the down leg of a correction, from peak to trough, takes about six months, a rough measure repeated today in the latest research note from Goldman Sachs. In other words, we’ve got a few more months of selling by wounded bulls and panicky mums and dads.

After the rush for the exits, which is always a stupid thing to do, comes the recovery and that’s when we all get a positive surprise because, as Goldman Sachs noted, the return to where we were takes about 12 months.

So, rather than panic, it’s a case of watching events (even if you’re not enjoying them) and identifying the quality stocks which you wish you had owned in the last up-leg and taking a position as markets settle.

J.P. Morgan, a bank in the same class as Goldman Sachs, reckons a local favorite, Fortescue Metals is a strong buy, simply on a measure of the powerful earnings being generated by today’s iron ore price and the prospect of continued high demand for steel in China as it launches a rebuilding boom.

From around $9.40 yesterday (it was $1 less on Tuesday) Fortescue could be heading back to $11, according to J.P. Morgan.

Perhaps London is a different place to see a global event unfold thanks to the stoic “keep calm and carry on attitude” which comes from working through centuries of crises, none of which stopped the show.

A personal survey of fund managers I’ve spoken to over the past week reveals a number of shared views when it comes to the commodity sector, with what happens next in China the top of everyone’s list.

Interestingly, China is no longer seen as the problem it was two months ago as its economy slowed thanks to the effects of the trade war with the U.S. and then crashed during the coronavirus lock down of major cities.

China today is back playing the role of economic rescuer as it gets a grip on the virus, restarts its manufacturing engine and gets ready for a pump-priming injection of government spending which will, in turn, re-boot commodities.

Another factor high on the list of London bankers includes the Saudi-v-Russia oil war which has the potential to turn very nasty as two belligerent and aggressive oil producers fight for market share and geopolitical power. A win today for oil consumers could easily turn into a loss tomorrow.

Central bank activity, which has already started in the major economies is being closely watched, not that many people expect the latest round of interest rate cuts to do much given they’re already on the floor (or through the boards), but government spending could be a big booster as the rest of the world follows China with a spending spree.

Gold, which has emerged as the big winner from the global shake-out of asset values and confidence in government, will remain a go-to investment, but it should also be one to watch carefully.

Wildly bullish gold-price forecasts, such as the $US3000 an ounce this week from high-profile Canadian economist, Dave Rosenberg, could come true, but there could also be pressure on gold later this year if government spending triggers a surge in the prices of basic raw materials such as copper, nickel and zinc.

If there is a key take-away message from London bankers it really is as mundane as keep calm and carry on. The correction we’re having was both predictable and widely predicted – what wasn’t expected was for it to happen in a matter of hours, but that’s probably a result of high-speed trading and the rapid flow of news.

So, if the correction came quickly, a question to consider is whether the correction to the correction (also known as recovery) can come just as quickly.

The Goldman Sachs guide to bear markets is six months down and 12-months to be back up.

It would not be a surprise if this time the fall is faster (we might already be at the bottom, or close to it) and the recovery could be underway before Christmas – fingers crossed.


Image credit: Washington Post

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