In Central Banks We Trust
07 May 2020
Trying to pick market tops and bottoms has long been viewed as a mugs game and the months of March and April showed why.
On 23 March, the markets turned. The Australian market had fallen 36.5% in a month, despite three days of large gains. If you tried to buy anything in those few days, you were way down. Then markets turned (for now)?
We saw a few policy announcements that seemed like a big deal in the context of the past, but markets kept falling. Then they let loose. The Central Bank and government policies were enough to stabilise the situation and we could look to the other side. From that point there seemed to be more optimism about the virus (which in the US and Europe seems unfounded at this point). However, it may be that the markets are reacting positively to a greater focus on the economy as opposed to the virus. The consequences of flattening the curve are now in focus and the policy mood has swung.
There are still a lot of unknowns and we expect more ups and downs to come. The economy has been on hold, but the big question is what happens when it reopens. Can we keep the virus spread down? Will they just let it go in other countries? What will company balance sheets look like when the loan repayment and rental holidays end and businesses have utilised the low interest loans on offer? Will people be nervous to go out or will younger people fill the streets?
The US equity market has performed much better than Australia, yet Australia has done so much better containing the virus? Seems odd when the falls were due to the virus or more appropriately, the health policies implemented to deal with the virus.
In the US, the big five technology companies make up more than 20% of the S&P 500. The big four banks are a similar weight in the ASX 200. That tells the story.
We invest in four of the five big technology companies as they are the highest quality businesses in the world today. Most of them have enough cash on hand to fund the whole of the Australian government’s relief package. Their greatest risk is regulatory action taken by governments, as these companies have the rare attribute of being at the forefront of innovation and able to continually widen the gap with the field. Previous incumbents tended to rest on their laurels and get chipped away at over time by smaller, more nimble competitors. When it comes to their share prices, they are not as attractive as they once were, but patience is certainly a virtue when it comes to investing.
In the end, we would rather rely on Quality than the position of the Tea Leaves. You know they will be there on the other side and it appears for several of these companies, they will come out even stronger than they went in.