Wow. Global travel had become routine for many. We thought the Global Financial Crisis in 2008/09 was bad, but that’s a distant memory except for those who speculatively borrowed to the maximum. In 2009 the CBA was paying 6% for term deposits. Today it’s a paltry 0.5% per annum. That is a whopping 90% pay cut for conservative investors living on bank interest. The average Australian was largely unaffected by the GFC, but COVID in 2020 was very different. Many Australians were forced out of work after Sunday 22nd March. This crisis has been different to previous events with this one severely impacting landlords (when some tenants instantly ceased paying rent). Specialist Doctors discovered they didn’t have a “guaranteed” income when they too, were forced to close. Every school and university student was affected (and many parents added another duty as school teacher). This all triggered uncontrolled waves of fear and news cycle addiction. It resulted in the fastest equity market correction in history. In just 4 weeks the Australian ASX300 fell 36% to 4,500 points and the US Dow Jones fell 37% from 29,500 points to 18,600 points. The subsequent worldwide government stimulus eclipsed every previous record (referred to by some journalists as the New Economic Theory). The JobSeeker payment doubled and many “workers” got a pay rise to stay home. Add to this $35 billion of super withdrawals by young Australians along with the inability to go out for entertainment or travel. These factors fueled an extraordinary “spendathon” on home wares, consumables, electronics, renovations, etc. commencing within days after the lockdown being announced as per the image on the right.
Many of these retail businesses were paying minimal net wages (with JobKeeper subsidies) and whilst paying substantially reduced rent to landlords. This resulted in record profit results for companies like Supercheap Auto, Kogan, Wesfarmers (owner of Bunnings), local nurseries and so on. Since October, the RBA started injecting a further $100 billon of stimulus through the bond market and interest rates are now an incredible 0.10% in Australia, with the RBA Governor failing to rule out the possibility of negative cash rates. On the back of 40 years of reducing interest rates, asset prices in real property (particularly at the higher end) and business valuations have very quickly reached new highs, much to the surprise of many who have remained in cash, believing things would (will) get worse.
These generational low interest rates have created significant opportunities in lowering the barriers to entry for those able to secure finance at record low rates to buy the latest ‘asset’ technology (with instant tax write offs) to aggressively compete with established businesses with higher costs and older technology. Examples include those aggressively targeting the high margin products of the big banks and others in capital intensive businesses like smelters and refineries outside Australia making our producers globally uncompetitive. Within Australia our challenges remain with our relatively high energy and wage costs combined with the loss of revenue from international arrivals creating a void in tourism and education, with some universities facing a 30% loss of revenue. This position has recently worsened with the escalating trade frictions with China imposing restrictions on our exports of livestock, wine, timber, lobster, coal and so on. For these reasons you will continue to hear us talk about the journey of increasing allocations to international businesses to dilute the concentration of Australia based portfolios to financials, resources, and property.
One of the key learnings from this crisis (and previous we have seen) is the need to maintain commitment to a strategy and a long-term focus. Too often our minds drive fear into our decision making to protect the downside. We very rarely, if ever, think and quantify the missed opportunities or lost upside by the very reaction we have to fear. As we sign off this update the ASX300 is up a massive 50% (and the Dow 60% and back to historical highs) from the darkest day on 22nd March 2020. The calendar year return of the ASX300 and Dow to 30th November 2020 is 1.5% and 6.8%, respectively. Most would say this is a surprising outcome as we need to remember the news cycle thrives on attention-grabbing negative news.
As always, please call us anytime if you have questions on your strategy. We are here as your professional advisers to guide you to make better financial decisions to best achieve your objectives, taking only those risks which are academically proven by evidence. Until 2021 we wish you a wonderful festive and summer season with your family and friends.