Is this really the next GFC?

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Livewire Markets

15 trading sessions: That’s all it took for the ASX200 to collapse by a stunning 32% as of midday today, erasing four whole years of gains. This is a conundrum because, while some screaming bargains have appeared, the market is in freefall. 

Given this strong downward momentum, we brought this interview forward for you as Chris Stott of 1851 Capital and Tim Serjeant of Eley Griffiths discuss this very issue here.

Watch (or listen) as the one and only Matthew Kidman asks our guests whether this is the next GFC, some strategies they are using to manage portfolios, if it’s time to buy yet, and the signals they want to see before it’s time to get back in. 

Take note because, as Matt reminds us, ‘picking bottoms can be a messy business’...  

Notes: You can access the video, podcast or edited transcript for this Buy Hold Sell episode below. This episode was filmed on 11 March 2020.


Matthew Kidman: Welcome to Livewire Markets, my name is Matthew Kidman, and wow, what a few weeks we've had. Markets down probably a bit over 20% since February 2020, all the talk is about viruses. We don't know where it's going to end, we didn't know it was going to start. But to join me to talk about it today, Chris Stott from 1851 Capital and Tim Serjeant from Eley Griffiths. Chris, I'll start with you. Picking bottoms is a messy business, but are we there yet? 20%, big sell-off, that's a bear market technically. Is it time to buy or is it too early?

Too soon to buy

Chris Stott: We think it's too early. Shorter term, I think there's perhaps a bit more pain to come until we get clarity on the virus. We're going to get a vaccine eventually, so until the market, the market doesn't like uncertainty. So until we get certainty around the virus, we can start to process more the economic impacts, which I think we're now factoring in mild recession in Australia over the next six months. So until we get clarity around that, it's hard to be bullish short term, but I think on a 12 to 18 month view, there'll be proved to be a fantastic buying opportunity over the next few months, once we get clarity around some of those issues.

Matthew Kidman: We all know that we're started behave differently. Toilet paper, washing hands, keeping away from each other...

Chris Stott: No handshakes!

Matthew Kidman: No handshakes. Elbow touches, but what is the market really concerned? Is it the drop off in earnings? Are we going to get a raft of downgrades because the economy is slowing economic activity is stalling? Is that what you're ...

Chris Stott: Yes is the short answer. We've already seen that today from Webjet pulling out or removing their guidance, so you'd expect there'll be a number of companies that downgrade over the next few months based on the impact of the virus, but the question will be, the key thing that we look for is when a company downgrades the stock actually goes up, so it's actually priced in and that appears to be the case in some, and what will be the case with some names over the next few months.

Matthew Kidman: Okay. Tim, we'll stick with you with the same question. Bottoms of markets are hard. We've had a lot of markets turn up. We had the bond market rally really strongly. We had currencies move and then the equity market. Are we there yet? Or, same question to Chris or is it a bit too early?

Tim Serjeant: Look, I think one thing that we're monitoring is what's happening in credit markets and it just feels as though there's some nervous signs emerging there. High yield credit, an indicator we watch is backed up to over 6.5 I think is the latest rating. CDA spreads, cost of insurance, investment grade, they've started to go parabolic in recent weeks. So that's a bearish short term signal. And so we're just being a little cautious in the short term. I think S&P has come out today and said for Australia, this is a worse event than the GFC. They won't maintain the AAA credit rating, but I mean that's fairly alarmist I think, but...

Portfolio positioning

Matthew Kidman: You're starting to make me feel sick, I remember the GFC. So what about, let's go down into the portfolio now. You guys have got to manage portfolios regardless. You can't just step on the sideline. What do you do? You get your cash weighting up, you get defensive, how do you move things around and what have you been doing? Because it was very quick, the last few weeks.

Tim Serjeant: It's been a 20% correction in three weeks. So in some regards if you, if you weren't sort of already defensively positioned, you had to act and respond quickly. It's hard to have conviction in times like these when things move, but one of the things that we've done and we've increased our cash weighting, that's an obvious thing to do. And we've increased our weightings to what we'd call sort of more defensive sectors, and we tend to tilt towards New Zealand for those kinds of names and things like Fisher and Paykel, healthcare is an obvious one. Chorus, defensive, telco style business models. That's where we've been deploying our capital. And if there's anything I think things, macro beta trades, things like wealth managers, that's a tough place to be now. Mining services, where the outlook, we're still reasonably robust, but essentially they're high beta trades and they're the kinds of things that you're trying to remove from the portfolio at this point.

Matthew Kidman: Okay. Chris, small caps, you specialise in, hard to move the portfolio around quickly. They're not that liquid. Some days, a couple of weeks ago, first trade, 10% down, no questions asked. So how do you do it? What do you do with your portfolio?

Chris Stott: So there have been some days where you see some particularly micro cap stocks down 10, 15, 20 percent a day. So they're great buying opportunities and that we've selectively been buying a few things like that very, very gently. It's also a good time, times like this to review the portfolio in terms of portfolio liquidity, making sure you're staying as liquid as possible, which we always do. But also, as we sort of touched on earlier with credit markets, having a really good look at company balance sheets. And ensuring that for any company that's got a high level of gearing, that if you're fully across, how far away they are from their covenants and those usual things that most people would be doing in markets like this. Typically, those companies that are geared the heaviest, fall the hardest, and they fall, they're first to fall. They're also the ones that you're going to make the most money out of on the way out of this. So they're typically the things that we've been doing over the last couple of weeks.

Another Global FInancial Crisis?

Matthew Kidman: I'm getting all nostalgic now, it feels like the GFC. Is it the GFC, or is it much more containable than that in terms of economic activity and of course the market?

Chris Stott: I think it's hard to say, the difference here is this, the GFC was more a debt problem. This is going to impact society more directly with the virus itself. So, and again, like we said earlier, it depends on how long that goes for. I think you're going to see a significant slowdown in global growth. We effectively priced that in already, the 20% drop we've seen in the last two to three weeks, it's just a matter of how long that goes for. And until we get clarity around that, it's hard to really go hard and and invest in any big fashion in the equity market.

Watch for signs of a recovery

Matthew Kidman: Okay. Tim, let's look for some signs. Because markets fall, eventually they bottom, then they rally. We've had a lot of stimulus, or talk of a lot of stimulus. We've got interest rate cuts, that should be good for markets, but what's the catalyst? What would you be looking for, for the investors out there to say, righto, now's the time to start looking at the long side, getting back in the market?

Tim Serjeant: I think the stimulus is coming, you know, we're seeing almost 75 basis points implied into Fed cuts for the March 18 meeting next week. There's lots of talk of fiscal stimulus in Australia and some headlines today around that, circa 15 to 20 bil. So they're going to be sort of positive in the short term, risk element's been destroyed in the space of four weeks. I think that the three things we're looking at, one is as I mentioned, credit markets, and probably just some subsiding of the activity there in terms of what's been going on. I think liquidity particularly on up days, I think one of the things we've noticed is it's been sort of a lot better to sell clearly and by about 30 or 40 percent more turnover on the down days thus far. So, looking to see proper buying step in on the up days and I think the whipsawing at the moment intraday is not a helpful signal. Probably just seeing the volatility die down and you can monitor the VIX is the obvious thing.

Matthew Kidman: Chris, what about you? Do we keep looking at those numbers every day? Who's got the virus? Is that the... And who's dying? Is that the question when it tapers off, or...

Chris Stott: I think it's more around, it's not about the virus now, it's about what it's doing in the economy. So, I think the next phase of this is to start studying who's, which company is going to be downgrading their earnings. Starting to see some hard data around what impact it is having on economic growth. And we're going to get that data coming through over the next six months to give us a more sense of the impact of the virus itself. At some point the virus will be, come under control. You know, we go into the warmer months over in the Northern Hemisphere, we'll wake up one morning, there'll be a vaccine, which will be, somebody will have worked out a vaccine, but it won't be produced for another six to 12 months. At some point it will fizzle out. And I do look at the Chinese market in particular, in how they've been able to make, keep it under relatively good control. So that is an example of quite a big country, obviously one of the biggest in the world population wise, it has been able to maintain the virus at a certain level.

Matthew Kidman: So it's time to keep your portfolio in quarantine for a little bit longer yet before it's all clear.

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