From the March 23rd intra-day low of 4,429 to the current close, the ASX All Ordinaries index has rallied 19.4%. This begs the obvious question: is it time to go all in?

There are certainly some signs that this may well be the time. For example, the market is increasingly reacting positively to bad news; the breadth of stocks rallying have increased, volumes and volatility are both declining. Commentary is becoming less pessimistic. These are all indications that in the short term at least, sentiment has turned.

But most of these factors are secondary to the main drivers and so in effect they are really noise. Noise that distracts us from maintaining our focus on what is most important.

In our earlier piece, we were clear to identify what were the key factors that would drive a recovery, and then to map out progress against those factors. From a glance we can see (below) that we have made progress against all the important drivers. From the original position less than 2 weeks ago (in grey) we can see that ‘Fear’, ‘Volatility’ and ‘Credit Spreads’ in particular have all made significant progress.   

However, the 2 most important drivers as we see them, still have some way to go. In particular, we are concerned that we have some way to go along the US Infections Bell Curve and hence being able to quantify the Economic Impact. Indeed, revised estimates are now pushing back the peak in US -infections to weeks 3 or 4 in April. Whilst that does not seem like a long time, we need to remember that infections grow exponentially not linearly.

There is a possibility that the Australian market may decouple from the US, given the positive progress being made here in combating the spread of Covid-19. But whilst this is a possibility, the probability is that as in every major dislocation, our market will follow the US more or less.

There is also the argument that markets are forward looking, and a degree of this pending escalation in the US has already been factored in. Whilst this is true, in our assessment we are likely to see some horrible images, headlines and statistics in the next 3 weeks.

For all investors, such imagery is tragic and distressing. These are human lives lost forever and suffering on a widespread scale. These are events that are hard to process emotionally and mentally. But we need to be awake to the impact that such images will have, which in all likelihood will lead to a 2nd wave of fear and panic.

There are still opportunities that we are very selectively sniping at present. Quality emerging companies that are trading 60% and more below their February prices. With the vagaries of percentages, a share price decline of 60% is equivalent to a gain of 150% from the current price in order to recover to the pre-existing level. This is a risk-reward we are happy to take on irrespective of the macro backdrop.

But on the whole, we are waiting to see how the next 1-3 weeks unfold in the US. As Howard Marks regularly reminds us, there are 2 risks in investing: the risk of losing your capital and the risk of missing an opportunity. I’ve experienced both risks too many times to remember, and the first one hurts a lot more than the second.  Not to mention its permanent!

David Hilcher

I am unsure how you imagined the volatility and fear have peaked. Australia has not even released its COVID modelling yet. Far too many people - especially in the markets - still believe this is a flu that is going away in a few months. Far too many analysts are stating fear and panic as if this is all psychological. The impact on the economy is in no way priced into the markets. Many many many business will never recover. Many.

Ian Ashman

I think you deserve credit for putting your views out there. But... With a second wave of infection commencing in China, the EU decimated and unlikely to recover for 2-3 years, the US simply kept afloat by massive sugar hits (diabetic coma not far away), Indonesia etc unable to even quantify the growth of infection, not to mention what happens when (not if) the virus cripples large chunks of Africa... I can't see a sustainable recovery likely for several years, Which means I can't see anything that warrants investment in stock markets (as opposed to gambling which is really all that the markets are at the moment and great fun if that is your thing).

Radley radula

Has anyone heard of what the criteria for easing lockdown will be? No, because it would need to be a period of at least 2 weeks with NO NEW CASES! This is a long time away and all the while lockdown continues [which it has to quite rightly] and the economy is being strangled. A bit early to be charging back in for "bargains".

Romano Sala Tenna

Good comments and certainly a very fluid environment. WRT volatility, we reference the VIX.ID which peaked at 85.5 on 18/3 and stuck above 80 most of that week. Last close is 57 so whilst still very elevated, it has declined substantially. WRT businesses recovering etc this is a critical aspect; i've covered off on our views re: Government stimulus in 2 prior pieces so perhaps you may have time to read them. In terms of 'could this take longer to recover' the answer is absolutely. The emphasis of this piece is to remain a) remain focused on infections and not get swamped by the noise and b) to highlight that it is premature and at the EARLIEST we need to see progression along the US Infections Curve before deploying real capital. If i may add one final comment, the term 'Planet America' is apt! They really are predominantly focused on what happens on their shores. So whilst the virus may have a greater impact elsewhere, it is what is happening domestically that will drive their markets and hence ours. Visa vis the Dow Jones made a record high in mid Feb even though Covid-19 was ravishing Wuhan. It wasn't until it reached US shores that the markets reacted!

Paul Vazey

Thanks Romano , great article. How do you also factor what is unfolding in India? I feel we haven't factored in correctly the economic impact of what is currently unfolding in India, given it's importance for our resource Industry.

Romano Sala Tenna

It is still too early to call what impact temperature has on the Covid-19 virus so this could be a material mitigating factor. But yes there is a real possibility that India and elsewhere could experience devastating crises. As difficult as this may be, we do need to separate human crises from the financial impact. Australia's trade with India is 1/6 that of our trade with China give or take. So there will be an impact but it is well down on our list; dare i say it some of the 'noise' we need to remove to enable us to focus on they key drivers over the next 2-3 weeks.