MLC Portfolio Manager Dr Ben McCaw provides an update on the markets.So, as most of us are no doubt aware, both share markets and credit markets have had a particularly challenging month, and this has been driven by two factors: the containment efforts around trying to stop the spread of COVID-19, and the sharp drop in the oil price that was driven by a disagreement between OPEC members and Russia.
Both of these combined have impacted both supply chains and impacted demand in the real economy, which has a negative impact on company earnings that has pushed share prices lower.
But, while markets are down 20%, it's worth bearing in mind that we're only back to levels that we saw in May 2019. Now, in May 2019, investors were also challenged by uncertainty, but at that time it was the uncertain nature of how trade negotiations between the US and China were going to work out.
But, at least when China and the US were butting heads over trade, you could apply a political-economic framework, and if you assumed rationality, then it was sort of clear that the chance of a resolution was probably higher than the chance of continued decay in their relationship, simply because both of the leaders faced domestic challenges that they needed to resolve. For instance, Trump had an election in 2020.
But the situation we face now is very different. I mean, the economic impact of the COVID-19 containment efforts are far less certain. It's unclear, for instance, whether the COVID-19 disease is going to have a seasonal factor or not.
So, right now, investors are having a very difficult time forming a view on how the actual impact on supply chains, how the impact on demand is going to impact share prices. Hence, the very large increase in volatility over the last couple of weeks.
But, while it might sound a little unsettling, and I think there could be some downside ahead of us should the COVID-19 containment efforts end up having a bigger economic impost than we currently think, this will be a short term issue.
It's far more clear that, over the long term, COVID-19 and the containment efforts will wash through the system. Long-term growth may have a small impact, but for long-term focused investors like us at MLC, the recent sell-off provides an opportunity to start acquiring assets at attractive prices.
So, of course we've made some changes to the portfolios in response to the sell-off. We've taken profits in gold, we've taken profits in some of the foreign currency holdings that we had, and we've sold out of some tail-risk protection that we held in the portfolios. These combined have helped the portfolios steer through this period of volatility.
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