There is not much we can say about Covid-19 that you won’t have already seen in the media. The spread of the infection and the impact that it is having globally is, as everyone is now saying, unprecedented. That said, in most countries the rate of new infections does appear to be slowing, and policy makers around the world are looking at how they can relax social distancing measures (without incurring a second wave) and ease open parts of their economies.
Immunity and/or a vaccine are needed for the world to re-start properly though. Without which we expect our borders to remain tightly controlled. There is some hope for a vaccine with Professor Sarah Gilbert of the University of Oxford stating her group are in the early stages of a vaccine that, if it works, may start production in September. If it works is a big question, but Professor Gilbert’s group has had success previously in rapid vaccine development.
Other highly experienced and well-resourced research groups are tackling the same problem – and many are sharing information and data. So, being optimists, we think there is hope for rapid development of a vaccine. Even so, getting medical confidence in a vaccine by September still leaves an enormous logistical question of it how can be produced in the quantity the world needs and delivered across the globe.
Last week saw a rally across the world as markets took heart from the early indications of a lower infection rate, and ongoing fiscal and monetary stimulus efforts around the world.
The USA announced an additional US$2.3 trillion expansion of the Federal Reserve’s balance sheet (which will take it soon to total assets of US$11 trillion). The additional allocation includes $500bn for municipalities, starting the Paycheck Protection Plan liquidity facility, $600bn for the Main Street Lending program (loans to SMEs), and expanding the Primary and Secondary Market Corporate Credit Facility and the Term Asset backed Securities Loan Facility to $850bn.
In conjunction with the fiscal packages, the USA is throwing unprecedented stimulus across most parts of their economy. This won’t stop a sharp economic slowdown but it will make the trough a lot shallower – helping drive the rally last week in risk assets.
One of the key indicators that we are watching is the growing number of job losses being registered in the USA. Jobless claims rose over 6m for the second week in a row, bringing total claims to 17m for the past four weeks. This has marked one of the most devastating periods in history for the American job market, as first-time claims for unemployment benefits have surged more than 3,000% since early March.*
*CNN Business Report
Meanwhile another battle of sorts has been playing out on the backfields, namely oil, with OPEC+ eventually coming to an agreement to reduce production by ~10m barrels per day for two months. Oil markets haven’t been particularly excited by this agreement as there had been an expectation of larger / longer lasting production cuts. Estimates of 35m barrels per day of demand destruction due to Covid-19 suggests that the 10m bpd production cut is insufficient by itself to stabilise the Oil.
The Diversified Funds
The equity hedge that we mentioned in the last report has been removed from the Growth fund and reduced by 3/4s in the Income fund. Net growth asset exposure is 25% in the Income fund and 81% in the Growth fund.
We have used the big down cycle to start reinvesting the portfolios and, with the recent rally in growth assets over the past week, the work continues to manage the daily swings in market volatility.
We continue to remain underweight bonds in the Income fund. We cannot justify owning bonds at the moment and, as a consequence of this, cash levels remain fairly high.
Australasian and Property Equities
All of our portfolios have been taking the opportunity to reset weights in our high conviction stocks.
The Auckland Airport (AIA) placement early last week was a very good example, and an opportunity to lift our holding in the airport from relatively low levels. While we think border controls will stay in place, and the earning environment over the next few months will be difficult, the longer-term view is that we think this is still a great place to have some investment.
We continue to hold higher than normal cash allocations in the Australasian Equity fund and the Australasian Property Securities Fund to take advantage of buying opportunities.
A case in point being Metlifecare (MET). The acquirer of Metlifecare issued a notice to the company that they are triggering the Material Adverse Conditions clause in the takeover agreement and withdrawing from the deal. MET responded that there is insufficient change in conditions for the clause to be triggered and that the deal should stand. This created quite remarkable volatility, giving us the chance to add to our holding at very low levels.
Volatility remains fairly high, even though markets have bounced a bit from their lows in March.
As mentioned in our last update the negative impact of the Covid-19 pandemic on the property sector was swift and brutal. The normally defensive attributes of the property sector were overlaid with the risk that many tenants (particularly retail) will struggle to pay their rent, with a number already asking for rental reductions. The length of the lockdown in New Zealand, and the move to lower restriction levels will be key to how the NZ property sector performs over the medium term.
The property portfolio was able to participate in both the AIA and MET opportunities discussed above.
As well, the property portfolio has re-weighted into Precinct and Kiwi Property Group – both well capitalised groups that had been oversold.
We anticipate that the Covid-19 rate of infection should continue to abate, due to the social distancing measures taken across the world. However, without a vaccine, those same social distancing measures will need to remain in some form for quite some time to keep the virus contained – even though Level 4 lockdown might be relaxed in coming weeks. Hence, the economic implications still have some time to play out, and volatility across the markets will remain elevated. This creates a dynamic environment for both risk and opportunity. At the risk of showing both my age and taste in entertainment – Lets be careful out there…
Disclaimer: Anthony Halls is Head of Investments at Mint Asset Management Limited. The above article is intended to provide information and does not purport to give investment advice. Mint Asset Management is the issuer of the Mint Asset Management Funds. Download a copy of the product disclosure statement
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