Pockets of Value Emerging in Ravaged Markets

Tuesday, 17 March 2020
Adelaide, Australia
By Bernd Struben

  • Markets
  • A stock market like never before
  • Passive no more

Here we are then, in the middle of a Black March. The bear market has done more work in three weeks than you often see in five years.’

Port Phillip Publishing Founder, Dan Denning

Long-time readers will remember Dan Denning, quoted above, well.

When it comes to thinking outside of the financial shoebox, Dan has few equals.

Dan left our shores in 2014. This also meant his departure from Port Phillip Publishing. But he never left the Agora family. (That’s our international parent company.)

These days Dan, among other things, is the co-editor of The Bonner–Denning Letter. The other editor, as you may guess, is Bill Bonner, Agora’s founder.

Anyhow, Dan returned to Melbourne a few weeks ago for what was meant to be a short working vacation. He’d planned to fly back to the US later this month. Those plans, unlike most aircraft, are now up in the air…at best.

But in truth his timing couldn’t have been better.

With markets devolving into chaos, Dan — together with editorial director Greg Canavan and Aussie gold analyst Shae Russell — got together to discuss how best to help our readers through all the uncertainty.

In their filmed ‘Market Crisis Summit’, the trio investigates what it will mean if Australia slips into recession for the first time in 33 years…if it hasn’t already. And, perhaps jarringly, they look into whether the last 24-hour global market rout has created once in a generation buying opportunities in select sectors.

As Dan wrote earlier today:

If it’s a cyclical bear market — the deflating of excess leverage built up since 2015 — the bear’s work is mostly done. You should be looking for cheap assets on sale (as hard as that is to do).

The ‘Market Crisis Summit’ airs tonight at 7pm AEDT. You’ll receive a link via email, so be sure to check your inbox.

Now a look at the markets…

Markets

US stocks sold off heavily on Monday, again racking up losses not seen since 1987’s Black Monday.

Overnight, the Dow Jones Industrial Average closed down 2,997.10 points, or 12.93%.

The S&P 500 closed down 324.89 points, or 11.98%.

In Europe the day’s damage was more limited, though the monthly losses are staggering.

The Euro Stoxx 50 Index closed down 135.65 points, or 5.25%. That was enough to put the index down 36.4% over the past month. Meanwhile, the FTSE 100 lost 4.01%, and Germany’s DAX closed down 489.83 points, or 5.31%.

In Asian markets Japan’s Nikkei 225 is up 58.75 points, or 0.35%. China’s CSI 300 is flat at 0.00%.

The S&P/ASX 200 is up 181.40 points, or 3.63%. A welcome respite following yesterday’s thumping. That saw the index lose 9.7%…it’s worst day since launching 20 years ago.

West Texas Intermediate crude oil is US$29.08 per barrel. Brent crude is US$30.05 per barrel.

Turning to gold, the yellow metal is trading for US$1,507.74 (AU$2,470.90) per troy ounce. Silver is US$13.09 (AU$21.45) per troy ounce.

One bitcoin is worth US$4,999.13.

The Aussie dollar is worth 61.02 US cents.

A stock market like never before

We’re not out of the viral woods yet.

The global lockdowns are likely only just beginning. Australia looks to be getting close to pulling the trigger. Schools may well shut before the end of March…if not sooner. As will cafes, bars and theatres.

The US, where the coronavirus threat was widely dismissed just two weeks ago, is taking drastic action. They haven’t quite emulated the total lockdowns we’re seeing in Italy and France. But that may come shortly.

Yesterday, Donald Trump admitted there’s a real problem. One that may even sink the US into recession.

Trump also acknowledged the need to control the rate of transmission. For the next 15 days (at least) he ordered Americans not to gather in groups of more than 10. He closed the schools. And he said not to travel unless needed while avoiding restaurants and bars.

On a positive note, Trump added, ‘Once the virus is gone I think you’re going to have a stock market like never before.’

We concur.

Yet we make no guesses as to when that will be.

In the interim, of course, all of this will impact people’s ability to do their jobs. Meaning that mass stimulus efforts or no, unemployment will almost certainly balloon.

Aside from the usual suspects — hospitality, education and the airlines — the retail industry will likely take a big hit.

For a better idea, have a look at the chart below. I pinched it from this morning’s The Age:


Port Phillip Insider

Source: Thomson Reuters / The Age

[Click to open in a new window]

This chart goes back to the turn of the century. As you can see the plummeting retail sales in January and February this year are wholly unprecedented. It dwarfs the pullback from the GFC in late 2008.

To put a number on it, the value of retail sales fell 20.5% relative to the same two months last year.

Yet the worst may be yet to come, even in China.

Julian Evans-Pritchard is Capital Economics’ senior China Economist. She warns that, ‘The March data is likely to be even worse… A jump in unemployment will weigh on consumer spending even once the virus disruption fades.

But as I mentioned up top, health and wellbeing fears aside, it’s not all doom and gloom in the markets.

Some of our editors are already busily hunting for — and recommending — stocks at prices not seen since 2016.

You’ll hear some of that in tonight’s ‘Market Crisis Summit’.

Passive no more

Passive investing can do the trick in a raging bull market. When entire markets rise by 20% or more in a year, as in 2019, you can do well with a simple index tracking ETF.

When instead markets are crashing 30% of more in a single month, you need to be decidedly more selective.

Healthcare stocks are getting a lot of mainstream attention. And for good reason. Not all healthcare stocks have gone up since the market cottoned onto the potential fallout from the virus. But many have.

Like Fisher & Paykel Healthcare Corp Ltd [NZE:FPH].

The company makes medical devices used to treat respiratory illnesses. One of the main complications from the coronavirus.

Bucking the trend FPH just issued a profit upgrade as demand for their products soars.

The share price is up 5.4% over the past month. Not the kind of gains you might have bragged about last year. But in that same time, the ASX 200 is down 27.8%.

Over at his advisory service, Crisis & Opportunity, Greg Canavan is already focussing on the opportunity. And he’s digging far deeper than healthcare stocks.

Here’s what he wrote to his subscribers this morning:

Once this virus subsides — and it will — markets will look at economic growth and corporate earnings returning to normal. I believe that will result in a strong rebound.

That’s especially the case given all the cash central banks are pumping into the markets. In the fear and panic stage, such actions seem to fall flat. There seems to be an inexhaustible demand for cash. No matter what central banks pump in, there is demand for it.

But when the panic subsides, there will be a lot of cash looking to move back into equities. I don’t know when that is. But it will happen.’

On Friday, when most investors were running scared, Greg made two new stock recommendations.

At time of writing, one of those stocks is up 8.0% since Friday’s opening bell. The other is down 3.9%.

Readers who took his advice on both stocks should be sitting on a gain of 4.1%. In that same time, the ASX 200 is down 2.6%.

We’ll leave it there for today.

Don’t forget to tune in to hear what Greg Canavan, Shae Russell and Dan Denning have to share in tonight’s ‘Market Crisis Summit’. Look for that link in your inbox.

Cheers,
Bernd