The Australian sharemarket has fallen by 25% since the start of the year as a result of the COVID-19 pandemic. Commercial property has crashed by 50%. The residential property market has also crashed by an unknown amount, maybe 20-30% for inner city apartments. This is not going to be a short-lived crisis with life going back to normal in a few months.
Some of our largest and most well-known companies are currently generating no revenue and technically insolvent. Businesses with a monopoly market such as airports and toll roads have experienced a sudden loss of revenue. Even highly paid Barristers, Surgeons and Accountants are now out of work.
The hardest hit sectors are:
- Accommodation & food services
- Arts & recreation services
- Retail trade
They represent nearly 20% of our economy. Some of those companies have already significantly downsized and many will cease to trade permanently. With a few notable exceptions like Qantas and Scentre most of the pain is being felt by small and medium businesses that are not listed on the sharemarket.
Now that significant stimulus measures have been announced, the sharemarket has stabilised. However, the situation globally is very uncertain.
The most important first step is to come to terms with the new circumstances and be ready to face reality. Wishing and hoping for things to go back to normal in a few months won’t help.
There was already a trend toward online delivery of services (travel agents, education, retail etc). That is likely to accelerate. Many bricks & mortar type businesses will disappear forever and be replaced by online delivery.
Demand for commercial property will be permanently lowered. Few people will be willing to risk their life savings opening a retail shop and many large companies will decide that they prefer their staff working from home so that they can save money on office space.
Six of the ten largest companies in the world by revenue (not market value) last year were oil companies. Given the collapse in oil prices it is likely that they will all fall out of the top ten this year.
The sectors that are experiencing a surge in demand include:
- Home Entertainment
- Internet & Mobile Phone Services
- IT & Consulting Services
- Supermarkets & Food Retail
The large global companies that will benefit the most from these trends are:
- Alphabet (Google)
The first four are already in the top five largest by Market Value (not revenue) and their dominance will only grow over time. Electronic transactions and delivery services will be the new normal. I am not suggesting that you invest all your money in these companies but it is possible to tilt your portfolio towards them.
The final Federal Government budget deficit in the 2009/10 financial year (during the Global Financial Crisis) was $52.9 billion. This was the highest ever deficit on record. It took 10 years and considerable political upheaval for the budget position to recover from that crisis back to a deficit of only $4.2 billion in 2018/19.
The government has announced $200 billion of stimulus packages and there is an estimate that the additional impact of the COVID-19 crisis will be $100 billion. That projects a deficit 6 times larger than the previous biggest. This will have an earthshattering impact on the financial position of the government. Some people have suggested that the Government will make no attempt to repay this money. That is possible but the experience of 2013 suggest there will be powerful political reasons for them to at least attempt to repay it.
Government revenue will need to increase by at least 10% for the next 7-10 years to repay that debt. Some will argue that the majority of the stimulus is being paid to companies therefore they must pay it back. The company tax rate would need to go up to 40% with no imputation credits for anyone and no CGT discounts. Alternately the tax rate of everything will need to go up. The arguments in the previous election about imputation credits and negative gearing will seem trivial by comparison.
This will have a major impact on investment returns, cashflow and structure.
What should you do?
Re-think your goals, risk profile and liquidity requirements.
Everyone should have a minimum cash reserve that can be easily accessed at minimal cost in an emergency. The concept of a lazy balance sheet (too much cash, not enough debt) needs to go in the bin.
Young savers who have many years to go until retirement can afford to put all of their investments in growth assets. That won’t change. With a long enough time-horizon all market crashes can be overcome.
Retirees who rely on investments to fund their lifestyle should have all of their investments in a diversified portfolio of liquid assets with a significant proportion in government bonds. This crisis has shown that most retirees cannot afford the risk of holding direct property investments. It doesn’t make sense to sell those assets now but at some point, when markets are closer to normal, you should make a plan to transition your portfolio to something more suitable for you.
The Great Depression in the 1930’s scarred a whole generation of people for life (https://en.wikipedia.org/wiki/Silent_Generation). Their sense of security and attitude towards money was fundamentally altered for the worse. Their extreme aversion to risk doomed them to making bad financial decisions and living an unnecessarily frugal lifestyle.
This crisis will similarly scar many people. There will be a major change in mindset for older investors. Careful, thoughtful action can soften the blow. We know that financial markets nearly always outperform after crashes and financial crises. Financial Advisers can help by giving you cold hard facts. It will be tough but we can get through this.
We are happy to offer a free 30-minute Zoom or Skype consultation to discuss these issues with you in more detail.