COVID-19 has everyone thinking about their health and the safety of the people around them. Unfortunately, that’s not the only stress in people’s lives. The disruptive effects of the virus have Australians thinking about the economy, and the apparent fragility of their investment portfolios.

How fragile your portfolio is, depends, in a large part, on how it’s been constructed. If the construction included speculative equities, those companies are probably going to struggle to survive. When the market has a major correction, the sexy story counts for nothing. It’s the fundamentals that matter.

The good news is, when a portfolio has been constructed from, for example, large ASX 100 companies with strong balance sheets, the future looks much more promising.

The other thing you might be thinking about is the potential opportunity a market correction of this magnitude represents. But of course, there’s a lot of noise and confusion out there. So, before we get too far ahead of ourselves, let’s look at what’s happening out there right now in the economy.

The economic news is good and bad.

  • An economic contraction in Australia in the next two quarters is likely and it will damage small businesses and cause job losses.
  • The shut down of non-essential services through the economy has created some more uncertainty in financial markets in the very short term.
  • Enterprises that have a high degree of leverage and debt and high fixed costs will find the economic conditions challenging.
  • The good news? Governments now understand the severity of this health crisis and its economic impact and are implementing stimulus measures, akin to a “whatever it takes” approach.
  • The US is likely to have a mild recession – but this is not the end of the world.
  • The US economy has just had a period of one of the largest economic expansions
  • Our view at Elston is that the Australian economic downturn will not be as long as our investment timeframe of 3 to 5 years.

Another thing that’s worth keeping in mind is that while COVID-19 will result in an economic slowdown in the shorter term, Australia has had 28 years of economic growth and, heading into this event, the stats show we had grown to be the 14th largest economy in the world.

Government debt is comparatively low.

Prior to the pandemic, the IMF had predicted that the Australian Government debt could fall to around 15% of GDP by 2023, while the average debt ratio of advanced economies will remain at around 73%. The low level of public sector debt underpins Australia’s AAA sovereign credit rating and stable outlook from all three rating agencies.

If China recovers, we recover.

When we look at Australia’s top 12 goods and services export markets, China is clearly the biggest. When China recovers, the Australian economy should start to flourish. The good news there are encouraging signs that China may already be on the mend.

If things improve, how agile will you be?

Okay, so now that we’ve reviewed the economic storm clouds (and the potential silver linings) let’s talk about the agility of your investments. One of the ways that agility can be achieved is through Managed Discretionary Accounts (MDAs). At Elston Asset Management we offer SMAs (Separately Managed Accounts) and IMAs (Individually Managed Accounts) that are based on proactively managed portfolios. It all sounds good, but what exactly do portfolio managers actually do? Well at the moment, our portfolio managers have been:

Stress testing the portfolio of companies we own, and the companies we currently don’t own (within the largest 100 companies in Australia).

Focusing on the detail in Balance Sheets, analysing Australian bank dividends and reviewing the impacts of the weak oil price.

Waiting. There is no need to rush. A decision to do nothing, AND remain invested, is still an investment decision.

Adjusting portfolios when it’s appropriate.

Allocating some cash from a tactical cash position to parts of our growth portfolio.

This proactive approach to portfolio management is vital right now. It can also set investors up for a more agile future when we start to see the market recovering. This agility is backed up by clear, calm communication. Even as our team switches to working externally, we’re keeping the conversation going and reaching out to our clients with fresh updates to cut through the noise and provide greater clarity.

If you would like to know how Elston’s approach to investment could help you to strengthen your portfolio and position you for greater agility in the coming months, don’t hesitate to get in touch with us at 1300 ELSTON or info@elston.com.au

Sources:
Elston Asset Management, Fidelity, UBS, Macquarie Research, Fidelity, Lighthouse Investment Services, Platinum Asset Management, Magellan Financial</small