Shaw and Partners' Chief Investment Officer Martin Crabb discusses global economic conditions in the US and Europe and assesses how markets are reacting to COVID-19, explaining the implications for the Australian market
Martin Crabb: Thanks Clive and good morning or afternoon depending on where you are in Australia and welcome to another FNN investor event. So I've been talking at these for a couple of years now and have to say that it gets more challenging every time I come and try and make sense of the market. So we're obviously facing two very competing sets of forces, if you like. On the positive side, we've got a company reporting season which is kicked off in the US and has probably been a little bit better than expected. Companies do tend to talk down their earnings estimates and then beat them in the US, a bit of a phenomenon. But historically, we're about a quarter of a way through the reporting season so far in the US and things look pretty good.
We've just kicked off reporting season here with a couple company results out this morning, which were a little bit mixed. But against that, we've got this backdrop of unprecedented, word gets used a lot, fiscal and monetary stimulus. So it looks like the US government, the White House and the Republicans have agreed on another stimulus package there. They're just trying to get that through the Democrats.
We had the European Union come together for the first time really to announce the significant, almost two trillion euro package last week. Obviously we had the Federal Government here extend a range of measures to support the economy here, so we've got this massive level of monetary and fiscal stimulus since the no no boundary and that's obviously supporting the economy in the short term and probably making things a little bit better than they would otherwise be.
So we've got that on the one side and obviously with interest rates being anchored and pretty much zero for the next number of years, people can sort of invest and borrow money with a relative degree of safety given everything else that's going on in the world. So we've got this huge amount of money that's going into the system and pushing up asset prices and we've got interest rates that are anchored at very low levels and those two things conspire to make growth assets particularly attractive. So as the discount rate used to discount cash flows is reduced, you can pay more and more for growth assets. So we're seeing that in the NASDAQ. We're seeing that here with the buy now pay later stock. So anything that's a long duration asset, as we call it, which is where the cash flows are well into the future, that asset becomes more attractive with low interest rates.
And another asset that becomes more attractive with low interest rates is obviously gold. We often think about gold in terms of the holding cost. It doesn't pay you an income or a dividend but nor does a bond or an equity these days. So gold is relatively attractive in periods of low interest rates, particularly low real interest rates.
Now, we've got the Fed meeting this week. We don't expect much to come out of that, but what they might do is talk about their longer term expectations in terms of where they're setting monetary policy for the next two to three years. And we expect that Jerome Powell will hint at the fact that they're not going to change rates in the US until inflation is sustainably above 2% and not many people have that happening for the next two or three years. So that's just that real interest rates will stay negative for a number of years and that is very, very supportive for gold.
So although gold is absolutely tearing, it's hit $2,000 an ounce in Comex trading, the outlook for that is positive over the next number of years. So we think those precious metal stocks, even though they will be volatile in the short term as people take profits, we think that part of the portfolio is interesting, even at current prices.
So against that positive backdrop of incredibly loose fiscal and monetary policy, we obviously have a number of risk issues which come and go and obviously, coronavirus is at the head that. We're seeing obviously the impact of secondary outbreaks in Victoria where the case count's pretty bad and we're seeing the impact that's had on that economy is about to shut down. Even today, elective surgery's being banned in that side. So they're really starting to lockdown and try and get on top of it. So that's going to weigh heavily on the economy. We're seeing that happen in California. We're seeing secondary outbreaks in European countries where they've relaxed their lockdowns, whether that's in Spain or Sweden or other countries, the UK where our note is back above one.
So that's sort of in the background, just keeping investors nervous. We've obviously got rising trade tensions between the US and China. We've got the impending US election on the 3rd of November and the potential for a change of government, so we're certainly not out of the woods at all in terms of risk. So we think the market's kind of fully priced at these levels and really the name of the game for investors is to work out the winners and losers from the coronavirus. So this is going to permanently damage some industries and permanently boost others.
We're particularly concerned about real estate, particularly office and retail. And we've positively disposed towards companies that are involved in obviously healthcare, looking for vaccines and so forth. But obviously in the digital space as well, so we do have a couple of companies presenting today that play to those two themes and we think investors have to be nimble and look for those industries that are favoured by what's going on in the world and avoid those which are being permanently disrupted by the coronavirus.
So with those thoughts, I'll hand it back to Clive and hope you enjoy the conference.
