There is no easy end to this

Hi, I'm Charlie Jamieson, Chief Investment Officer at Jamieson Coote Bonds and this is a review of markets from home for March 2020. 

Well, what an incredible month it's been. We've been talking to investors for a little while now about coronavirus, but all of our worst fears I guess as a people have been realised. It's clearly a very material health tragedy and it's going to have shockingly devastating economic effects for all economies around the world. 

Pleasingly, Australia has done a pretty good job to date. We've all got to hope those curves continue to flatten. But what does life look like when we open our front doors and try and re-emerge into the world? I think that's the critical thing that the markets are trying to fish around for. How much material structural damage have we already seen and what is the outlook for many risk markets and what are the liquidity of many assets going to look like?

We've seen over the course of March incredibly volatile moves in all asset markets, some panicky selling of all asset markets in a race to generate liquidity and solvency. We simply believe that now we've got ourselves to the RBA policy objective, which we've long talked about with our investors. The Central Bank rate is 25 basis points. We have an active QE programme here with the RBA having already purchased $35 billion of government bonds and semi-state government bonds. Those assets are going to remain very liquid and they're going to be a wonderful store of wealth for investors. 

Sell spreads and stress elsewhere in fixed income

But down the lower echelons of the fixed income markets, there is immensely illiquidity. There are a lot of assets that are simply not being traded or priced and there's been a huge amount of stress. 

And we've already seen a lot of fund managers have very poor returns in what is supposed to be a defensive and liquid type offering. And we think that's really, really ordinary.

The other thing which we're very upset about is the increasing of sell spreads, which many fund managers have also added to their funds. We haven't had any problems at all servicing our client needs through this period. We haven't changed our sell spreads, but some of those other offerings have had material sell spread changes, which is further highlighting that the problem of the illiquidity and the loss of economic value in those types of offerings. 

So I think asset quality is incredibly important and it's very important as we always say to look under the hood and really have a deep think about what you're actually investing in because clearly we're going into unprecedented economic shock.

10 times the size of the GFC shock

If we look at the U.S. examples of their employment numbers from just last week, the worst numbers we saw in jobless claims in the GFC was a 665,000 person increase in a particular week. Last week in the United States, we had 6.6 million, 10 times the size of the GFC shock. 

And we know that there is still immense sufferance, particularly in and around New York where clearly authorities haven't done a good job of containing this. 

So this is going to be with us for a long time. We are going to have a very deep recession as a result of this shock and this movement to flatten the curve and to lock down economies. 

We really need to find that peak in the curve and try and work out what kind of life we're going to lead as an economy coming out of this to really think about where risk markets should be.

We are just one month into a long journey

I just want to highlight to investors that from top to bottom in risk markets in the GFC, that took 17 months. We're really only one month into this. It's been very violent and obviously pretty scary at times, but we're not about to find an end to this easily, we don't believe. 

Until we get a vaccine or we get a herd immunity as a people, the virus is going to continue to roll around the globe and it's going to be with us for a long time. It's going to make 2020 an incredibly challenging year on every front, but particularly for markets. 

Bonds are doing their job well

Bonds, in general, have done a fantastic job of providing that defend and protect alternative. Government bonds are finishing broadly with positive returns through March.

As we said, it was fairly volatile in there, particularly in and around the middle of the month, but now with the RBA fully functioning, providing that buyback function, you can have great certainty that there is a wonderful store of wealth with some income and fantastic liquidity. All of the things that we've always promised our investors and that is why you accept what would be a lower expected return than many other instruments. 

Government bonds are showing exactly why they are a critical portfolio inclusion and they're still going to have a very big role to apply going forward to offer out all of the things for investors to consider. 

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