Are we hiding from a drop bear?

Credit where credit is due, I borrowed the title from Troy Theobald who used it this morning – he assures me it is an original…

So, very exciting news cycle this week. Australia had a negative quarter of growth in March (-0.3%) and the forecast is, we will have a negative quarter in June as well! This will mean Australia will technically be in recession for the first time in 29 years.

Now I don’t want to blow my own trumpet, but ‘I’ already made this bold call back in April.  Probably a far better result than I anticipated but a large spending spree certainly cushioned what was an obvious statistic to every Australian who left their home after the 20^th of March?

Australia has achieved a health result that is the envy of most countries in the world and after testing 178,885 Australians in the last 7 days, our health authorities managed to find 72 cases and we currently @ 04 June have one case in ICU.

This includes Australian residents returning from overseas, though the Premiers won’t release how many of those 72 actually flew in.  One Premier did let slip that they could only find one case of ‘community’ infection this week but that could well have been caused by a returning resident as well?

Our reaction to this Pandemic has been extraordinary and while I do hear commentators talking about an overreaction, that is very easy to do in hindsight. We have world examples where the result has been far more severe so we should not underestimate the impact it could have had.

Unfortunately, in a not dissimilar way to some companies having become very exposed in a reversing market, some countries have had glaring structural flaws brought well and truly into the light.  The US is one of those and yes the horrific death of George Floyd in Minneapolis triggered the rioting, but you have to think that such a prosperous country should have sorted its health system, social security and gun controls well before this. Italy, France and Spain have shown similar concerns – without the gun issues.

In short, great result for our country but we do need to get back to work, as international borders will not be opening any time soon and exports and the domestic economy are the main levers that will drive the economy into the black.

As far as Covid19 – good luck finding that drop bear. (No, Mum and Dad, that does not mean you are allowed out.)

So why, while there is chaos in America and the media here is bemoaning our recession, is the sharemarket going gangbusters?

In the month of May, the Australian ASX 200 climbed by 9% and the US S & P 500 improved by 7% and the UK FTSE was up by over 5%.

Now before we get too excited – a quick maths lesson.  If you have a $100 and lose 20%, you have $80.  If you have a 20% performance from there you get to $96.  To get back to $100 you need a 25% return.  Great if you invested at the bottom but tougher for those in the market.

Still very happy to see lots of ‘green’ and this is the lesson about moving from ‘really bad’ to ‘not so bad’.  That is where a lot of money is made.

The sharemarket is forward looking and makes assumptions based on future earnings, not current.  This market behaviour would indicate analysts and investors are expecting some short-term pain then a relatively quick recovery.

They could be right however we would suggest we could see some more solid fluctuations before situation normal is returned.  This is where our active managers really earn their keep.  They are looking a lot further over the horizon than a broker.

• A broker tends to think in short term blocks – what is the price today relative to where it could be in a week. What news is likely to impact the price?

An active manager tends to know the price they see as value and buys and sells based on that price.

Active management and adding value.

This last period has been the active managers in our portfolios, ‘time to shine’.

• A rising tide does lift all boats and simply buying the index (passive strategies) works in a growing market.
• Passive options do play a part in many of your portfolios, but we also include carefully selected active managers as they protect on the downside and tend to recover more quickly after negative markets. This can add substantial value.

This is exactly what they have been doing.

The portfolios look very solid over 12 months (1 June 19 – 31 May 20). Remember the alternative was cash (1 _1.5%).

• The AAN Core has done +7.48% vs the Australian All Ords index of -9.54%
• The AAN Growth has done 7.99%
• The AAN Australian Equities has done -1.51%.

While the Australian equity fund return is a negative, the underlying active managers have outperformed the index by 8.03%.

• To put that in value terms if you had an investment of $500,000, you would be over $40,000 better off in just that twelve months.

For the Core and Growth models you would have approximately $537k and almost $540k respectively on the $500k investment and that is during one of the most dramatic periods any of us have seen.

Can we relax?

Unfortunately, no, but as we have said from the start, each week we get closer to a new normal and our team are very much taking the time to appreciate each new easing.

Enjoy your weekend.

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