FYI | Apr 07 2020
By Peter Switzer, Switzer Report
For my weekend story, I did something I usually try to avoid — name-calling. I called the doomsday merchants, who’ve been predicting doom ever since the GFC, ‘lucky’ dummies because of the Coronavirus! We’re not supposed to be in a bear market now but the containment and lockdown policies have wreaked havoc on businesses, profits, wages, economies and share prices.
It’s taken us down so fast, a bounce-back could be quicker than we think if the lockdown period and suppression phase is shorter than we’re suspecting right now.
Most of you know I was arguing that 2021 was going to be my real worry year for stocks. But before that it was 2020. However, the trade war changed all that. It made 2018 bad for stocks but 2019 great for share players.
Last week, one of my team used Google and came up with a story written by Annie Kane for mortgagebusiness.com.au in 2017 which makes me look really smart! “Peter Switzer has predicted that Australia will go into recession in 2019/20 due to the “historically low” interest rates,” she wrote. “Speaking at the annual conference of the Finance Brokers Association of Australia (FBAA) on Friday (24 November 2017), Mr Switzer told delegates that while the economy is strong now, he suspected that a recession would hit Australia by 2020. The former lecturer in economics said: ‘We’ve lived through one of the longest boom markets of all time, which has been one of the slowest boom markets of all time as well…’.”
However, with all my economics training, I’ve never studied Pandemics 101 and that’s because Economics faculties don’t teach it, yet!
We’re stuck with this tragedy but how we play this market madness going forward could have a big impact on where your capital is in one or two years’ time.
In early 2009, I asked IBISWorld’s Phil Ruthven what our stock market bounces back by after a bear market crash. He told me “anything between 30% to 80%…” And from early March 2009, our market went from 3145.5 on March 6 to 4870 by year’s end. That was roughly a 55% bounce!
So the Index was a good bounce-product. But how well did the CBA, for example, fare?
Keep in mind the overall S&P/ASX 200 rose by 55% between March 2009 and the end of December. However, CBA, was up 53% over that time. But if you’d gone long on this quality company on January 1 when the market was still falling, you’d have made 97%!
So there’s good reason to buy quality companies when fear is gripping the market. Warren Buffett advised us with his: “Be fearful when others are greedy. Be greedy when others are fearful.”
I hope we’ve seen the bottom with this sell off, but infection curves flattening and death rates dropping will be crucial. And that’s when the bear market will become a convincing bull market again.
If we’ve seen the bottom, then you might have missed the first leg up for companies such as CBA, CSL, Xero, BHP and Rio. All these are seen as quality businesses.
But what else might be worth looking at if the worst for stock price falls is over, or if we have another smaller leg down, which is possible over the next two weeks, with US infection/death rates being the big watch factor.
Paul Rickard has put down his list of what to buy and not to buy and here they are:
“Stick with the large caps in general, companies such as CSL, Macquarie, the major resource companies (BHP and Rio), Wesfarmers and maybe even the major banks,” he says. “Companies that have a record of delivering growth and who have leading market positions will be in high demand, and will see an expansion in their pricing multiple. This will include companies such as Xero and Altium from the IT sector, REA Group and TPG from Communication Services, Resmed, Sonic and Cochlear from Health Care, Seek from Industrials and Aristocrat Leisure from Consumer Discretionary.”
On REITs he says “stick to trusts that are focussed on commercial and industrial property (and preferably those with Government or major ASX company tenancies).”
What does he say to avoid?
Small caps unless you’re a thrill-seeker. “In the March quarter, the top 20 stocks ranked by market capitalization outperformed the next 30 lower ranked stocks, which outperformed the next 50 stocks, which outperformed the next 100 stocks,” he observed.
He makes the point that if you consider the travel, retail and discretionary stocks, “be very careful to work out whether the company may be impacted by a lasting change in consumer behaviour.”
For example, could the use of Zoom and Skype over the lockdown period result in less business airline travel, which could affect Sydney Airport, airline and travel businesses? And retailers might find that online browsing could have become relatively more popular than good old shopping in a bricks and mortar business.
That’s Paul’s view.
Here’s what the team at Morgans is watching. My TV colleague, Raymond Chan, sent this to me on Monday and shows you what’s on his shopping list.