Making Sense of ASX Volatility from COVID-19

Tough times for investors as the ASX has fallen -21% in only 20 days. Hugh Dive from Atlas Funds Management looks at how COVID-19 comes from an infected bat at the Wuhan wet markets to destroying portfolios across the globe. Explaining how 2020's fall compares with those of the Tech Wreck in 2000 and the GFC in 2008 as well as the normal cycle of -10% and -20% falls on the S&P500. Notably 2020's fall is different in the speed that has been exacerbated by ETF's now dominating around half of the market.

[00:00:00] The last three weeks have been very tough for investors. But the ASX falling more than 20 per cent and the markets fleeing from despair to hope. The news flow is dominated by medical forecasts of journalists and fund managers that are suddenly virologists and epidemiologists today until payday Tuesday. We're going to talk with Hugh Die from Atlas Funds Management, who is neither an epidemiologist or a virologist virologist, but rather a long term observer of markets. [00:00:28][28.6]

[00:00:29] Good morning to you. How are you doing, Chris? [00:00:31][2.2]

[00:00:33] Very volatile times. Can you please set the scene for us of how we got here? [00:00:37][4.8]

[00:00:39] Well, I think what's very sad and what's forgotten in a lot of the fevered commentaries that since 2012 12, the OECD, the equity markets, they're not agreement an upward trend. And while a portion of this has been due to earnings growth, a larger portion of the next growth is due to expansion in the price earning multiples as investors were willing to pay to higher share prices for dividend paying shares, saying that the deposit rates were drifting long. This was especially the case in 2019 where we saw a 20 percent gain in six. There's probably primarily due it was due to pay expansion. So the market was really sort of a little bit fragile in February 2020 anyway. [00:01:17][38.8]

[00:01:19] Now, PE expansion, a lot of those companies got some headlines. One of the best examples of those PE expansions. Oh, yeah. [00:01:26][7.7]

[00:01:27] So we'll look at the index as a whole. The market was driven on. So it's all a big drive over the lot over not 2019. The emergence of a a suite of exciting new tech companies that named the wax stock. So why is tech after pay LTM happened in 0? Companies collect lose value over $10 billion. But with minimal or no earnings. [00:01:49][22.5]

[00:01:51] So they've been driving the market higher into theory. Then kohver, 19, enters markets this unseen virus more frightening than GFC type of liquidity issues, or the nineteen ninety nine party of dot.com valuations blowing up. How did Kogut 19 infect the markets? [00:02:09][18.1]

[00:02:11] Well, as I've mentioned, I think global equity markets were ripe for a correction, but nowhere was going to come from. It came from a very unlikely source of either infected bat or pangolin bought in the wunan wet markets for consumption. So the having saved onto some of these markets on one hand and other places in southwestern China. There's a lot of very exotic wild animals on display in Germany are live to eat. So, I mean, if anything, this covered 19 virus may result in a diminution of that trade in wild animals consumption in China. So it's a positive thing. So aside from that, the covered bias is really only start to impact global equity markets about the 20th of February. So while it's malign presence, investors dominate discussions. It's really only sort of 28, 20 days old in the markets and we've seen the ASX come off 21 per cent in that time in line with other global indices. [00:03:07][56.5]

[00:03:09] Now, putting the markets aside and nobody forecasting how are infected that could influence equity or pangolin would be a poor man's. [00:03:17][8.7]

[00:03:18] A poor man's armadillo, poor man. [00:03:20][1.8]

[00:03:22] How did these falls compared to previous cycles? [00:03:25][2.3]

[00:03:26] Well, I mean, over this time, a census of volatiles moves on the ASX. And Monday was the fall was the worst was the worst since October 2008 and the second biggest since 1993. So fear has been a burmans dominant emotion in the market and is similar to what we saw in SA's in 2002 and 2003. Markets grappling with the impact of an infectious disease that they can't see and a negative event which very few investors have any mass experience with. [00:03:52][26.3]

[00:03:53] And unlike the GFC, can't be sold by sold by traditional financial remedies. So despite all this carnage and then headlines, the ASX is only down by 3 per cent, including dividends over the last four months. [00:04:06][13.4]

[00:04:08] Now index funds have possibly been getting a blame or finger pointed at them. How have they influenced markets in 2020? [00:04:15][7.3]

[00:04:17] Well, what we've seen in index funds of their share of traded managed funds have increased from sort of five to 10 per cent. So 20 years ago, although I was sent to own 50, 50 percent now. So I'm a much bigger impact. So the pattern themselves that we've seen very much has been very broad based and very different to the others. Corrections, for example, the dot com bubble in 2000, the GFC in 2008. So during those periods, because index funds didn't have a great influence, the selling was heavily weighted towards tech and media companies such as News Corp, Telstra and Sausage Source Software in 2000. The core of the dotcom hype. 2008, the financial engineered heavy debt companies such as Babcock Brown, Allco, Centro that couldn't refinance debt in a frozen credit market. Those are the stocks will help us solve quite heavily in this current market, where index funds are a much bigger impact of when an index fund gets redemption. The manager simply sells out a percentage of everything. So we're everything being sold down relatively uniform levels. [00:05:27][70.3]

[00:05:29] How does that influence market moves or falls? [00:05:31][2.5]

[00:05:33] What we see is a very similar. So every stocks, regardless of their quality or solid of their earnings, tend to fall down by roughly the same percent. [00:05:43][10.2]

[00:05:44] So in that environment, we support terrorism, which you saw on the Monday. Those big redemptions often from some retail investors in exchange, there's an index of Shanghai funds and that manager would simply sell a basket of a couple of hundred million dollar stocks, of which seven percent of it would be CSL, 6 percent, it would be Westpac and certain amounts of all different companies. [00:06:04][19.9]

[00:06:05] And that's just that's just mechanically hits the market. And that percentage that results in very broad based sales rather than selling based on companies are actually impacted by the negative events. [00:06:16][10.8]

[00:06:17] So are there any companies on the ASX that would have been hit by this selling where previously Tech Wreck or GFC? We would have looked at what will actually that company would probably stand up or profit from this situation. [00:06:29][12.1]

[00:06:30] Penny on the air, the index, the issue of Ozick, for example, CSL, which is one of the largest influenza vaccine companies in the world, yet its prices down 15 per cent in the last 20 days. It's a company that traditionally would have been put off if it would actually benefit from that citrate. And similarly. Okay. That's one of the largest global pathology testing companies was sold down. I mean, both of these companies are likely to benefit from the spread of the coronavirus. They have a negative impact on their earnings. [00:07:03][32.8]

[00:07:04] Would it fair parallel be back after September 11 when the markets finally reopened, the market fell off significantly. [00:07:09][5.5]

[00:07:10] But Lockheed Martin, the defense company that went through the roof. Is that. Yes. So definitely different. Now we have their broadbrush selling from there. Yes. [00:07:20][10.4]

[00:07:21] Now, that's that's a great that's sort of a great analysis, Christine. [00:07:26][5.0]

[00:07:27] And, you know, we move towards the markets and say, hey, E.T.s have changed. They are falling differently than what they have before these falls or movements. Abnormal? [00:07:37][9.7]

[00:07:39] Well, not really. So for all the despair in the press, market declines are part of investing in equities, which is why equities offer both a high dividend yield and the prospect of capital growth as opposed to bonds where you have a very fixed return and no capital gains. And as such that equity investors are compensated for the risk they take when they buy a share, which can go up and go down. And this appears to be forgotten in much of the coverage in the sharemarket over the past couple of weeks. And even despite the last really big four we saw occurred close to 20 per cent under fifteen months ago in October 18. Markets do move up and down with the animal spirits as part of investing in equities. [00:08:19][40.8]

[00:08:21] How often would these animal spirits really drive the market and send them up and down? [00:08:24][3.4]

[00:08:26] I mean, we saw some touch over the weekend since 1950. Looking at the broad based US S&P 500, which is a better index to look at for animal spirits, falls by 20 per cent occur on average about once every six year is held. The last one is a bit more recently in 2010, as I mentioned, and periods of 10 percent declines that occur once every year on average. The last 70 years, Mark, to what we've seen over the past couple weeks do happen frequently, but also some the things that don't last forever. So for all the doom and gloom in the papers, it doesn't bear up with it quite a long, long term task. [00:09:03][37.7]

[00:09:05] So if it doesn't last forever, the investors are scratching their head or panicking and wondering whether they should sell everything, set the block. [00:09:12][7.0]

[00:09:13] Well, that of can be very upsetting on a day when when the sky is falling in and that any pennies are in charge. [00:09:21][7.7]

[00:09:22] But so what we saw doesn't often not not the right thing to do. So so on Monday we saw the biggest days trade ever on there or on the ASX were close to the Australia with 1.4 billion traded. So a normal day is about five or $6 billion. And what was interesting was that the lowest trade was dominated by small investors with very few large blocks traded. So it indicates that institutional investors are sitting on their hands and saw the markets for quite dramatically. [00:09:52][30.2]

[00:09:53] That 7 per cent drop was was an Internet fall, but there weren't losses followed. [00:09:59][5.6]

[00:09:59] Buy a big game on Tuesday and then and then and then today the market's up a couple percent, so that's actually that's consistent. So look, there's no down 1 percent, though. [00:10:12][12.8]

[00:10:14] If retail selling into that kind of market, pushing that 7 per cent fall when we look at it in large block trades and institutions and not necessarily participate. What are the big end of town doing at times where retail and flooding the markets and pushing it down? [00:10:29][15.1]

[00:10:30] Well, on Monday there was the institutional basis, clearly. So the answer and so look to save it for today, we're looking to see some sort of positive gains in the United States. So it's some sort of potential positive lead. I mean, the best practice is not to sell everything and in fact, invest in institutional business. Cannot do that. So can't get a cash. The best practices to invest in companies with solid balance sheets and defensive earnings are likely to provide investors with consistent dividends to provide a variety of conditions. I mean, while the share price of company will move with market emotions, consistent dividends will provide both an investor with a cash flow much more tasty than term deposits and also provide a cushion against large price falls. [00:11:12][42.4]

[00:11:14] So it put this all together. Kevin 19s pushed the markets down. Dramatic falls, rapid speed, record breaking speeds. What's the view from Atlas Funds Management's perspective? [00:11:23][9.5]

[00:11:25] I saw a man who was the equity market likely to remain volatile spenders. Emotions swing between hopes as results indicate cases of the coronavirus announce, as well as demil tax cuts and potential vaccines. So those that will dominate because as I mentioned earlier, this is not something can be that can be seen. The virus is something that investors have very little experience with. We can't say when the coronavirus will be contained and when we'll end a long term investor saying the unpleasant crises in the market, we believe in the words of Abraham Lincoln. That, too, shall pass. So consumers are still. So what I would like to ask, companies can pay dividends to companies listed that consumers will still want to drive and pay them or just consume food and medicine, get medical tests done, as well as play lotteries and invest in companies providing these services. [00:12:16][51.1]

[00:12:18] So this too shall pass. The market still goes on, the economy still goes on. You and I are not leading back to the Stone Age. So, yes, they will still be life. These businesses just investing in those that have a robust balance sheet and will see their way through that I think are really important in times like this. [00:12:36][18.0]

[00:12:37] Companies that pay dividends. So it provides a break and a cushion. So looking at something I that. Or Transurban. Their company is never really unlike a sell down to a dividend yield gets to say 10 percent. That division provides a bit of an anchor point. Howard said a tech company is something you don't pay a dividend so you don't have an awful lot of earnings. [00:12:59][21.8]

[00:12:59] For example, suburb after pay. There's it's a bit tough to quantify what is the absolute downside when there's no dividend break where consumers will say, well, I'm getting one term deposit by this is that percent sure there'll be biddable share prices. But hey, that's pretty attractive when there's no dividend cut. That's a measure that doesn't really provide a break. [00:13:21][22.0]

[00:13:22] That's a very good way of looking at it and being realistic. They bring the fundamentals back to the equation, say, well, what should I invest? [00:13:28][5.5]

[00:13:28] What should I hold and how does that stack up in this market? Very good insights from Hugh Dove at Atlas Funds Management. Thank you. Thanks, Chris. [00:13:28][0.0]

[758.7]