UWJ Monthly Edition – May 2020

The disturbing events happening in the US as this newsletter goes to print pale in comparison to what has occurred in asset markets over the month. Looting, shooting and protests have led to widespread curfews in many states, just as COVID-19 restrictions are eased. We can only hope an appropriate solution is found and concerns of the population are addressed. It seems we make the comment ‘it was a busy month’ almost every month in 2020, from bush fires to COVID-19 and a worsening trade war, there are plenty of reasons for investors to be concerned.

Despite the real economic impact yet to be completely understood global sharemarkets continued to rally in May, for the second straight month. The S&P 500 increased 4.5% for the month and is down just 6% thus far in 2020, with the ASX 200 improving 4.2% but still down 14% for the year. The result has been many ‘experts’ suggesting that market has recovered too quickly and other suggesting that the worst is over. AMP’s Shane Oliver has interestingly suggest that consumer retail businesses will only recover from here. Many commentators are comparing the COVID-19 market correction to the GFC, suggesting this is just a dead cat bounce, despite this clearly being a very different, one-off shock to the entire world economy. In our view, there are simply too few participants that have experience across multiple crises to understand what is really going on.
The first signs of how poorly the global economy fared in the first quarter are coming through on a weekly basis. Some high(low)lights were the Chinese economy contracting -9.8% (and subsequently abandoning their 6.5% growth target, the German economy entering a recession falling 2.2%, the US economy contracting 5% and the UE -3.5%. Unfortunately, the worst is yet to come. The US unemployment rates increased to 14.7% from as low as 4% pre-crisis with 40 million people filing for unemployment benefits. Australia fared markedly better ballooning from 5.2% to 6.2%, with the Job Keeper stimulus likely delaying the inevitable spike to around 10% unemployment. Australia’s world leading stimulus package (as a percentage of GDP) is being offset by continued state restriction putting the hand brake on a real recovery. 

Dispersion remains the name of the game in global sharemarkets. Dispersion refers to the diverging performance of companies within the same index; think CSL vs. Westpac on the ASX. Case in point is the S&P500 strong performance since bottoming in March, but with relatively few companies, including Microsoft, Amazon, Netflix, Alphabet and Facebook moving the market higher. In Australia it has been the likes of CSL (ASX:CSL) and Afterpay (ASX:APT). Also known as attribution dispersion simply means that less companies are seeing share price increases and the ‘big are getting bigger’. Dispersion has historically been a fertile hunting ground for active investors as whilst markets overall appear overvalued individual companies are anything but.
The US-China trade war escalated once again following the forceful passing of a ‘Security Law’ in Hong Kong, bringing the population under Chinese laws and subject to charges for the likes of treason. Australia entered the fray as the Chinese finished a multi-year investigation by applying an 80% tariff to Australian barley and subsequently changed the import process for Australian iron ore. It is clear a renegotiation is occurring that may have long-standing impacts on Australia’s export-driven economy. The education and travel sectors are among the hardest hit.
The industry super sector is under increasing pressure from the Coalition Government with ASIC highlighting discrepancies in Industry Super Australia’s (ISA) highly questionable modelling on the negative impact of withdrawing capital. Clearly, they were seeking to scare members out of withdrawing at a time where liquidity and cash is key.

Research house Lonsec also made a well-publicized downgrade of Australian Super following its first negative performance in a decade. Lonsec cited concerns about transparency in terms of Australian Super not disclosing staff movements nor providing enough supporting information as to whether the internalization of their equity investments is both sustainable or delivering the performance expected of members. This came as industry fund owned ME Bank removed redraw account balances from struggling accountholders amid the worst of the COVID-19 shutdown without any disclosure.
It’s pretty clear that Modern Monetary Theory is in action across the developed world. The concept, rather than ‘belief’, being that Government balances sheets need not be run like a household budget on the simple basis they are able to print their own currency as required. This has been evidenced by the creation of billions of dollars by central banks around the world in order to get the economy through this difficult period. MMT seeks full employment via budget deficits with signs of inflation resulting in a reduction in spending, which seems to have worked in Japan; only time will tell the results in Australia and the US. The issue in our view has always been those entrusted with the levers or money printing and fiscal spending and ensuring it reaches the right parts of the economy. Some suggest this will support markets reaching new highs. 

There were two key themes in April and May, capital raisings and bankruptcies. In the US high profile companies like Hertz, JC Penney and J. Crew entered bankruptcy whilst in Australia the list of retailers and travel businesses in trouble continues to grow. On the other hand, some $20bn has been raised thus far by ASX listed companies attempting to make it to the other side of this issue. As highlighted in my article with Morningstar there is a big difference between companies using capital to repay debt and those seeking opportunities.
Our latest bug bear in this crisis has been the seeming procession of investment managers prognosticating on investment returns and the outlook for markets. This despite many claiming outperformance by falling 17% when markets fell 20% or underperforming even more heavily. We believe there is great value in outsourcing to professional managers but are clear they need to be assessed like any other investment, regularly and with complete transparency. As always, we suggest looking more closely at those managers making the news and comparing to the long-term performance of their funds, many of which are clearly lacking. 

In one of the more unsurprising events of recent months, the widely advertised Mayfair Platinum Group appears to be capitulating. The trustee of the IPO Wealth Fund, Vasco Trustees, has appointed receivers after the company failed to make a repayment of c$3 million. The convoluted structure of the business involves investors lending money to a separate company, which then invests these funds into a range of venture capital and other private companies. Some examples include yacht rentals and accounting IT platforms. The strategy being to use investors’ money to make higher returns than term deposits; the issue being they were marketed as low risk products to investors, something ASIC wasn’t too happy about. The group was heavily promoted by Switzer Media with some staff holding positions on the companies unofficial advisory board. This is a disappointing but not surprising result for all involved.