Why I've taken my fund to 90% cash

Russell Muldoon

REQON Funds Management

In our view, despite the recent jawboning by Trump et al. in his administration that all is 'ok' with the US and its economy, last night’s rate cut was quite a concerning development to us.

On the positive side, lower interest rates of 0.5% in the US, and 0.25% here in Australia, are a big tick going forward for 'relative' equity valuations vs. bonds - one only needs to look back over the last 10 years of interest rate cuts and the impact that has had on earnings multiples and share prices to see the positive relationship. In saying that, interest rates are only one part of the equation and company earnings are the other. We need both to be working together to produce higher equity markets and returns.

That equation feels unbalanced here.

What we are concerned with is the fact that last nights rate cut was the FIRST between meetings. The first 'emergency' action since the GFC. It's probably worth us saying that again... last night was the FIRST cut between meetings since the GFC. To us, that's a very important message and something that cannot be ignored.

If actions speak louder than words, in our view, central banks are telling us to be concerned about the economic impact of COVID-19 and are attempting to 'stimulate' their way out of it. This has of course been the go-to policy response over the last decade and it has done wonders for papering over issues and creating higher asset prices and hence confidence. But we do wonder; if borders are shutting, travel is being cancelled or postponed, factory workers can't get to work due to movement restrictions, millions of people are quarantined in their homes and schools are being closed, how will a rate cut help here?

Arguably, it won't and can't.

What is becoming clearer by the day is that the economy will be impacted. And if the economy is going to be impacted, then company earnings will also be impacted - and that's the big unknown, by how much and for how long? Earnings are a key input for valuations and if they go down, so do share prices and hence the stock market.

There has been a lot of posturing by a lot of commentators on this subject but quite frankly, everyone appears to be guessing. The data we have at the moment is patchy at best, incomplete at worst, and simply does not lend itself as a stable base to accurately make future forecasts - which is why we have such wide-ranging forecasts and opinions.

Hence, in such an uncertain environment with so many possible outcomes, we don't think there is a rush to put money to work here. Despite the markets initial reaction, those hoping for a V-Shaped recovery like SARS in 2003 (yes I am getting old!) might be sorely disappointed.

Given COVID-19s wide-reaching impacts on all G7 economies (some might say unprecedented in our generation), markets will struggle to 'bounce' higher from here and indeed we could be looking at the end of this mature bull market for some time until the global economy gets through this.

With 90 per cent of our fund now in cash, we do realise that we are attempting to 'time the market', something that has proven over time to detract value from investment portfolios. But we feel its prudent right now given the risks in our view are unfortunately stacked to the downside and the Fed rate cut last night was not the positive development we were hoping for. If anything, it has made us even more cautious.

Fear and uncertainty are driving the market, that we know for sure. But it will only be once we have reliable data points to analyse, and which allow people to start forecasting more-accurately again, that will be the point in our view to warrant considering a higher equity allocation in quality businesses with good growth prospects.

Asia and the world recovered from SARS with no lasting damage and we are sure to do the same post-COVID-19 here. This is likely to be a temporary issue, not a structural one, but it's prudent for us right now to stay conservatively positioned until peak newsflow is behind us and the data is available to make more accurate and informed decisions, instead of guessing.

So... thats what we are doing. 

1 topic

Russell Muldoon
Portfolio Manager
REQON Funds Management

CIO, REQON Funds Management. 23 years Investment management. Delivering material market outperformance for investors.

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