The biggest investment risk today for investors is to be underweight equities. The ASX Total Return Index as at the end of March, was down approximately 27% from it's January highs. This means for an investor who bought the high and held through the volatility, they would need to achieve a 37% return from the end of March to breakeven.

According to the Credit Suisse Global Investment Returns Yearbook 2020, Australia has been the highest equity returns in global markets on average since 1900. Achieving a 7% real return calculated in US dollars, compounded over a long time frame is not something that can be ignored by any investor, local or global. It is a testament to our relatively stable political environment, our natural resource endowment and our growing population; all of which bodes well for potential future returns.

Focusing on the present situation, we are clearly in an inflationary environment with widespread monetary and fiscal stimulus and support being provided by governments worldwide. In an inflationary environment, stocks are the only listed asset class that will provide a positive real rate of return; bonds and hybrids are vulnerable to the achievement of future negative real returns given interest rates are at their lowest rates in history. If you are a large investor who has been invested across asset classes, you have effectively have been made whole by the Australian government if you have had investments in local bonds and have sold. The next question in this instance would be: where to store your wealth to ensure it retains its purchasing power whilst achieving a nominal real rate of return?

Virtually all fund managers are cautious and under-invested holding larger than usual cash weightings. As we've seen in the past, the majority are usually wrong in a risk-off environment filled with the perception of uncertainty. If the market continues to grind higher it increases the risk of manager under-performance and consequent pressure from investors to increase market exposure to invest at higher equity values.

Another aspect to look at is could there be any news worse than what has transpired over the past 2 months? There is now significant data around the treatment and prevention of COVID-19. We know almost unequivocally that the elderly and obese with pre-existing conditions are highly susceptible whilst younger, healthy individuals have a relatively benign response to the virus. We believe that it's unlikely that COVID-19 will ever be fully eliminated for reasons beyond the scope of this article.

We expect societal restraints to be relaxed sooner than later, with higher risk individuals maintaining quarantine. The government can mitigate the impact of vast social issues that are arising from an extended lockdown by loosening current restraints. Behavioural changes don't need to be mandated to be followed, for instance, the past impact of SARS affected social behaviour in the hardest-hit nations leading the widespread voluntary adoption of wearing face masks in public.

Over the past 2 weeks, we have been selectively increasing our equity weighting with a focus on quality. Markets always move in anticipation of change and the seeds of every bull market are sown in times of uncertainty.

We discuss 3 of our new positions in a recent podcast which can be found here:

We're always looking for new investment ideas

Datt Capital diversifies investments across asset classes and duration to reduce risk while maintaining relatively concentrated exposure to attractive investment opportunities.

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Patrick Fresne

Maybe I am being too cynical, but given the close links between the Liberal party and the corporate world I can't help but suspect that many of the stimulus measures announced by the government in response to the pandemic situation have been formulated to boost the stockmarket. For example, the government decision to allow the early withdrawal of superannuation tax-free looks to me like a ploy to shift funds from the super funds into stocks directly. Certainly, based on what I am hearing, it seems to me that many of the people looking to withdraw their super next week are doing so with an eye to redeploying their money into the stockmarket. Considering the wave of money from superannuation and Jobkeeper payments that is set to flow into the Australian economy over the next three weeks, in addition to the RBA's quantitative easing and the record low interest rates, I tend to agree with the arguments presented in this wire. All things considered, you would have to assume that there is a strong chance of a significant stockmarket rally in the weeks ahead.

Michael Whelan

Patrick - whether it's 'being too cynical' or challenging the motives, it's all good debate and sharing of ideas. Suffice to say, people can't eat their superannuation statements. Emanuel - Good post and good podcast. I agree with 2 of our 3 'stock picks' on the AI Rask podcast :)

Emanuel Datt

Thank you Patrick and Michael for sharing your views