Pandemic, Pandemonium, Panic and Portfolios

25-Feb-2020
Investment
by Michael Davie


Late last year we launched our Micro-cap Monopoly competition for our loyal Facebook followers and clients; the prize being a $2,500 flight and accommodation voucher to the client (or follower) with the micro-cap company demonstrating the greatest growth over the Calendar year.

At the time, I was thinking that $2,500 would hardly make a dent in terms of a decent holiday. However, merely a few weeks later it appears that it could fund first class flights (sitting in 1A & 1B) for two people and a stay in a 5-star luxury hotel with your own private butler, chef and servant in Wuhan China.

There is no doubt that the start of our 2020 year has been hijacked by the global concerns relating to the coronavirus outbreak. There is a saying in investment markets: “when the United States sneezes, the whole world catches the cold”. China has apparently said “hold my beer” and proven that their sneeze is just as powerful in terms of their impact on world markets.

The stock markets have taken a tumble as the coronavirus concerns escalate, following the supply chain interruptions, earnings forecasts being slashed in certain industries and the evident impact that this is going to be having on tourism and travel.

Many (if not all) of our client’s portfolios have been impacted by the swing in investment sentiment and the underlying impact on direct Australian Shares and International Shares. However, in times like these, we have one of two decisions that we can make regarding your portfolio management:

1. Sell out of growth holdings and migrate back to defensive holdings

2. Stay the course and have trust in the structures and systems associated with your portfolio construction.

Each of the above solutions have benefits and risks and unfortunately, we can never truly measure which is the better option until many months after the fact. Therefore, let me walk you through our thinking and why we have chosen to opt with option 2 as opposed to option 1 at present.

When we build client portfolios, we structure the asset allocation or weighting towards cash, fixed interest and growth assets in line with your specific investor tolerance levels. We build layers of protection and defensive cushions into your holdings to ensure that pension payments, and income requirements are covered to satisfy the short to medium term need for cash and income support. We do this because we are acutely aware that growth assets can fluctuate in value, and we do not want to be in a position where we are forced to sell growth assets at a loss or at the wrong time.

The decision to hold firm and stay the course obviously can lead to further falls in equities and result in downward pressure on your portfolio valuations. However, if a vaccine is found and in the short to medium term it appears that the virus is under control, you will equally benefit from the rebound in equities and possibly pick up some additional stocks at bargain prices.

Alternatively, if we cash in our chips at this point, we will crystallise our short-terms losses and possibly miss the bounce on the way back up. For our directly managed portfolios, this will drive up brokerage costs in selling out and re-buying back into the market and for clients that are sitting in accumulation mode inside super, for portfolios held in investment companies or individually held portfolios, the sale of assets would trigger tax consequences in addition to these transactional costs. This is ultimately why we recommend that our clients stay the course.

Furthermore, for those of you in accumulation phase and receiving regular employer or salary sacrifice contributions or if you have been adding directly to your portfolio, you will benefit from the short-term drop in values.

Throughout 2019, we have been building additional surplus cash provisions for our clients. This was not in preparation for an unexpected global virus, but due to the fact we were late into an 11-year bull run cycle. These additional cash provisions were put in place to provide buying power for future stock market corrections. There is no doubt that we have entered a full correction with an over 10% drop in equities markets domestically and globally, and we should see some buying opportunities present in the short term.

When trying to time a bottom, it is very difficult, and we will tread with caution over the coming weeks. There is a short poem that I think sums up the current predicament:

“You pick up your coffee and take a sip,

With stock markets falling you buy the dip.

Then to your surprise, as you take it slow,

You find out later…… it wasn’t the low”.

Remember that perspective matters. We need to keep in mind that despite the large media focus on the negative swings in the stock market, we are as of 1pm on 28/02/2020 sitting 18% higher than the lows of December 2018. This correction places us back at market valuations of August 2019, when we were all commenting on how wonderful the stock market was doing.

We recognise that you may have questions and want to discuss the impact these swings have had on your portfolios. I encourage all of you to call me directly with your concerns, to discuss how you’re feeling and what your views are. The role of a planner is sometimes simply to cut through the noise and provide you with some perspective adjusted reassurance.

At Kuda Wealth we certainly are not seeing this through the lens of the mainstream media. I’ve been involved in investment markets for over 20 years and understand that we never hear the news about the thousands and thousands of planes that land safely every day; only the one that didn’t makes headlines.

Panic sells and the public interest is capitalised upon by the media, where we generally all source our news soundbites. I’m not for a moment downplaying the seriousness of this viral outbreak, nor the immediate impact on equites. However, often what is missing is the broader perspective, which reaffirms that only 6 months ago, when the markets were at these same levels, we were all feeling a sense of market euphoria.

With that note, I would like to highlight the top 5 people leading the pack in the Micro-cap Monopoly competition and assure you that we will continue to monitor and assess the market impact of the coronavirus.

Kuda Wealth Micro-Cap Monopoly Competition

1. AUT – Auteco Minerals - 300% Gain – Sonya S

Auteco Minerals Ltd (AUT, formerly Monax Mining Limited) is an ASX listed Company with a focus on copper-gold nickel and diamonds on the highly prospective Gawler Carton, South Australia. Company has acquired a large tenement holding in the highly prospective and underexplored Fowler Domain in western South Australia.

2. RXH – Rewardle Holding Limited - 233% Gain – Helen H

Rewardle Holdings Ltd (RXH) is a Digital Customer Engagement platform for local SME merchants. Rewardle is a social network that connects over 2.5 million Members with over 5,000 local businesses around Australia. RXH offers a digital marketing and payments solution to local independent businesses that is underpinned by a proprietary membership, points, rewards and payments platform.

3. SER – Strategic Energy - 150% Gain – Margaret H

Strategic Energy Resources Limited (SER) is a mineral resource exploration company. SER is focussed on the exploration and development of land with discoveries in Western Australia, South Australia and Victoria.

4. KTE – K2 Energy Limited - 150% Gain – Peter N

K2 Energy Limited (KTE) is an Australian publicly listed company listed on the Australian Stock Exchange. K2 Energy is currently involved in 3 major activities, being its oil and gas activities in the USA, its solar energy activities and its interest in Mears Technologies Inc.

5. CTO – CitiGold Corp Limited - 150% Gain – Damien P

Citigold Corporation Limited (CTO) is an Australian gold mining and exploration company, operating on the Charters Towers goldfield in north east Australia.

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