Coronavirus: what time is it on the ‘investment clock’?

The world is now in a sustained bear market, where fear is the biggest element at the moment, but there is hope and gains to be made, according to investment analyst Rod North.

Speaking with Small Caps, the respected analyst, market commentator and veteran of five share market booms and busts said these gains will occur “often sooner than expected”.

“Expect the All Ordinaries Index in this cycle to bottom out somewhere between 3,600 and 4,200 [points] most likely in coming weeks and months,” he said.

”COVID-19 does have an end date; the GFC in 2008/9 was more protracted and took further time to work into the next cycle,” he added.

Mr North said a turnaround could happen “much sooner” than expected if governments get on top of the pandemic and get the economic stimulus calibration right.

“The Australian government did this successfully in 2009 and averted a recession and still has a chance at doing it this time.”

Investment clock coronavirus covid19
Rod North believes we are at 2:30 on the investment clock.

“Cash payments and fiscal stimulus will be the order of the day to kick start the economy from a low point and get people spending again. It’s a fluid position and a waiting game,” he said.

Peaks and troughs are always part of investing in shares

The Australian share market reached an all-time peak of 7,225.2 on 20 February 2020.

“The share market is down a further 290 points or 5.98% to 4,564.10 – a seven-year low. This puts the overall market decline to date at 36.83%,” Mr North said.

He also believes the market seems to have “some resistance” at the moment at around the 4,500 mark, but that is likely to be short lived.

“There will be further bad news coming on many fronts over coming days and weeks before finally, the good news arrives, as the one thing we know is that COVID-19 does have an end date. We just don’t know when that is,” he said.

Mr North also expects the market to bottom in coming weeks and months at somewhere between an All Ordinaries Index of 3,600 and 4,200 points.

Investing in the share market, super funds and investments in the current climate

According to Mr North, global markets are now in “sustained bear market territory with fear the dominant psychology prevailing for the moment.”

“Fear, coupled with uncertainty is a lethal combination for share market performance,” he said.

“All companies and individuals around the world will soon, if they are not already, be fully drawn on their credit card limits and standby facilities and only government support and funding from the federal reserve in the US and reserve banks around the world can offer any relief as we wait for the contagion to pass and for life to resume to ‘normal’ – whatever the ‘new normal’ is – because it will be very different,” Mr North added.

How will investors, CEOs and companies react to the new world normal?

According to Mr North, it will take a while for individual investors, companies and many company chief executive officers to adjust to the ‘new normal’ and readjust from the good times of the 12-year long boom market and ‘greed cycle’ to the new ‘bear market’ and ‘fear cycle’.

“Some will not cope well with this and be found missing in action and won’t be the CEOs of the same companies in six to 12 months,” he forecast.

Mr North also predicts that some CEOs will not be able to deal with the new paradigm and the need to ‘communicate’ regularly to the market about how their company is performing under the current market conditions, how they will rebuild their company’s fortunes and reposition the company for growth in the years ahead.

Technology in the digital age will play a big part in recovery process

The markets never like uncertainty, according to Mr North.

“The market can come and go sometimes in time frames that don’t mirror other historical cycles. We live in a much-wired age of social media and the 24-hour news cycle, which is quite different from what we remember in 2000 or in the GFC of 2009,” he said.

“One thing we do know, is that we have technology  at our disposal and that we can use this to great advantage in the digital age to get our message out from our home, from our office, from the street – but we must get the message out.”

“As a result of the contagion and collateral damage caused by COVID-19, it will change the way we do business forever, and into the future it will be the catalyst to finally grasping the digital age industrial revolution in both hands,” Mr North added.

Some existing ASX CEOs will not run the same companies in 6-12 months

According to Mr North, “this is not a time to hide under a rock; if you do this as an ASX CEO, you do this at your peril”.

“We could see the share market turn around quite quickly as we come out of this cycle. All cycles over the past 145 years have been different in the length of time taken to the get to the bottom of the market and the time it then takes to reach new highs,” he said.

“The share market has always in history reached new highs and there is no reason why this won’t happen again as we eventually come out of the bear market phase,” Mr North added.

How much could the share market drop in this cycle?

Mr North said he doesn’t know at this stage exactly how long this bear market will last.

“The good news is that this could be a relatively short-lived bear market, depending on if and when the COVID-19 pandemic is contained, and a vaccine is found. Unfortunately, we are still a long way from reaching that point in Australia,” he said.

“We are likely to see an overall decline in the market of around 40% to 50% before we start to see the rebuilding and recovery process in the weeks and months ahead.”

“There is always hope and opportunity,” Mr North added.

World leadership needs to deal decisively with issues at hand

US President Donald Trump has now publicly stated the US could go into a recession.

According to Mr North, “this doesn’t help us at all in the uncertainty stakes”.

“The president also described COVID-19 initially as a bad flu, before then declaring a few days later a state of emergency in the US,” he said.

In the world league of the biggest economies, Mr North said China could “technically be in a recession at the moment, following what is rumoured to have been a very weak March quarter”.

“Coupled then with the June quarter, it could be likely to follow delivering a further negative figure,” he said.

Leadership in Australia must show decisive action in dealing with COVID-19 to prevent a recession

Mr North believes that the Australian Prime Minister Scott Morrison and his “COVID-19 cabinet” could “seriously be facing a recession in Australia – the first for 29 years”.

“It looks pretty clear that the March quarter GDP will be a negative figure and the only hope to avert a negative June quarter is to substantially increase the government stimulus packages with cash components,” he said.

Coupled with the recently announced drop by the Reserve Bank of Australia in the cash rate to 0.25%, quantitative easing will also be part of this strategy, Mr North said.

“There will need to be multiple stimulus packages and it is conceivable in Australia that this quantum could be as much as $100 billion or more to avert financial catastrophe,” h added.

If we have learnt anything from banking royal commission, customer is king

Mr North also commented on the results of the banking royal commission in 2019, claiming that banks that “spent decades focusing on shareholder returns will now need to entirely focus on the customer”.

“The banks will need to give mortgagees an embargoed period of three to six months or more on their customer mortgages or let the interest be capitalised onto the loan total,” he said.

“There will be widespread jobs losses over coming weeks and months and many people will not be able to pay their mortgage payments as they prioritise food and staples as essential items on their shopping list,” Mr North added.

What we could have learned from our Asian neighbours about dealing with pandemics 

According to Mr North, Australia should have learned lessons from its close neighbours in Asia about how they dealt with the earlier bird flu and SARS pandemics “as they are reaching containment much quicker than we will in Australia and in the western world”.

“Asia went into containment quickly and is now appearing to see the contagion curve flatten and come out the other end,” he said.

What happens when you reach bottom of the share market

Mr North said he has seen this all before in his career and expects the share market “will go lower before we see the bottom of the market”.

“More likely, we will see an All Ordinaries of 3,600 to 4,200 before we reach the bottom in this ‘new cycle’ of the market,” he said.

“The COVID-19 pandemic is still continuing to evolve and that creates a very high level of uncertainty that creates extreme volatility.”

“Markets don’t like uncertainty in any circumstances and are more likely to go down to much lower levels on further bad news until we eventually turn the corner,” Mr North said. 

Which companies can recover quickly when economy finally rebounds?

After working in leading funds management companies during his career, Mr North said, fund managers and professional investors “will be using this substantial decline in the share market to begin selectively purchasing undervalued shares and assets over coming months that can recover their earnings quickly when the market eventually returns”.

“The trick will be to quickly identify which companies can recover quicker and those that can best maintain their dividends,” he said.

There is always hope and more opportunity at the bottom of the market than at the top

From an investment perspective, Mr North said “more money can be made by cleverly investing around the bottom of a share market than it ever can at the top”.

He used March 2009 as an example, when the All Ordinaries Index bottomed at an all-time low in that cycle of 3,109 points after dropping 54.42%, then working its way over 12 years to an all-time high in February 2020 of 7,225.2 for an index gain of 133%.

“There is always hope and gains in the market if you are prepared to buy in the cycle when everyone else is still selling; however, no one ever rings the bell,” he said.

In closing, Mr North shared an old share market saying: “keep your head, whilst all around you lose theirs”.