Here Is What The Latest Signals Are Saying… (Covid-19 Update #11)

Covid-19 Update #11 – 15th April 2020

Peter Flannery CFP AFA

 

 

“If you have one economist on your team,
it’s likely that you have one more than you’ll need.” 

Warren Buffett

The above graphic shows the ongoing increase in COVID-19 infections, as well as the increasing death rate.

 

The graph on the left shows the movement in the Dow Jones Industrial average over the last 5 days.  The graph on the right shows the movement over the last 12 months. 

 

The volatility across markets has been significant and matches other times in the past when we have seen extreme conditions.  Of course, the volatility and trading price declines is just a distraction.  The real game is to focus on the emerging value.  The investment opportunity that we are now seeing is significant compared to what has been available over most of the last 10 years.  Still, we need to be discerning and avoid investing just because prices are lower.  The quality of that value reflects the quality of the business and that is what we want to invest in (not just prices that are low in the hope that they will recover). 

A good example (of low trading price without the value) could be Air New Zealand.  In my view, it is a great airline to fly with, although I have never invested and never recommended them, even though there may be some predictability around the movement of the share price. Indeed, in times like this, I always get a number of queries asking if Air New Zealand might be a good investment. 

The idea is that the trading price has dropped significantly and the government is a major shareholder.  So they probably will not let it fail.  It is very possible that as things get back on track in the future, that the trading price of Air New Zealand may well recover; however, this is a good example of speculation without the underlying intrinsic value (reliable business performance) to support our investing decision.  Anyway, there are currently numerous other options offering greater reliability and are less speculative than Air New Zealand.

The above chart shows the rough valuation using the price to earnings ratio across some markets.

Interestingly, the New Zealand market remains somewhat expensive, whereas most other markets are sitting somewhere around the long term average.  This means that markets are neither expensive nor cheap in general terms. 

The good news is that at WISEplanning, we are not investing across the market, but rather inside the market into specific businesses within the market.  Therefore, we are not simply buying across the market at the equivalent of a long-term average valuation, but rather we can select specific businesses that are likely better quality than the aggregate of the market. 

 

Do you trust the market?

Sometimes the market is right.  Sometimes the market is not right.  Therefore, it is an unreliable indicator. 

As I mentioned last week, in the latest Investment Perspective, better to price for risk rather than try and time the markets.  Let’s leave that to the market itself.  What you know about the market is that it moves up or down on the basis of the latest information at hand.  It is driven by a range of underlying needs to buy or sell that are likely different from yours and mine.  See what I mean? 

Anyway, the market is telling us that it feels as though it will survive COVID-19, as evidenced by the recovery in trading prices over the last week or so.  Specifically, 23 March 2020 saw the Dow Jones hit a low of 18591 and has obviously recovered somewhat since then. 

Yes – but will it last?  You will hear talk of ‘another leg down,’ which suggests that the current recovery is a so-called ‘dead cat bounce’ and that it is not over.  This line of thinking suggests that the worst is yet to come for markets. 

As we mentioned before, markets are an unreliable indicator and the commentary around markets is even less reliable, in my experience. 

If you are an advanced investor, you will have likely used up a good deal of the cash that has been sitting around for quite some time and so if there is another ‘leg down’ so to speak, then you will have less room to move than before.  That is okay.  What matters is the value that you bought as you invested over the last three weeks or so. 

If you are more growth orientated as distinct from advanced, then you may be adopting a somewhat more measured approach and might have a bit more wriggle room with cash should there be another leg down.  The bottom line is that if prices are cheaper, then we will take advantage of the value that emerges.  We will be happy with that (not lamenting lower prices). 

  

COVID-19 USA

The top chart is a predictive model, showing the projected requirement for all beds needed, intensive care unit (ICU) beds and invasive ventilators needed between now and August 2020.  The lower chart shows the predicative number of deaths per day up to 1 August 2020. 

Why American stats? That is because America is one of the largest economies in the world and impacts on everyone else to a greater or lesser degree.  The above charts look a bit different than the last time I showed them to you but effectively, the US remains ‘on track’ as per previous modelling. 

When we look at all the charts around the world, the trend is broadly similar in that, many countries have peaked or are in the process of peaking with regards to infections.  Death rates tend to be a more lagging indicator and follow the trend of infections.   There is a fair way to go yet. 

Back here in New Zealand, it is still unknown whether or not we will be released from level four lockdown.  My best guess is that it is unlikely to be a clean break out of level four and may involve a hybrid model that will mean different things to different people. 

The good news is that the initial phase of infection is behind us and whilst it continues, the narrative has now turned to how and when current restrictions can be relaxed and how we set about the journey back to ‘normal’ (whatever that means). 

Throughout it all, good health means that we have the chance of being resilient against the virus and good financial health means that we are not all of a sudden at risk without a month’s worth of income coming in. 

Although I do not have any numbers to show you, I do know that the vast majority of middle-income earners will get by okay financially, so long as they do not need to go for much longer than a month.  Stretch it out to three months and many are in trouble, needing outside support. 

How many months of income do you have in the event of an emergency like Coronavirus?  If you are okay, what about other family members? 

 

It isn’t the ups and downs that make life difficult; it’s the jerks.

                                                                                    Charlie Chaplin

 

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