Over the last week we saw events and information relating to COVID-19 flow rapidly. Infection rates around most of the globe continue to grow exponentially as governments attempt to slow the rate of spread through further lockdowns and restrictions around movements. It will take time to see how successful these measures are. Lack of clarity has contributed to an extremely volatile week on world markets.
This week we saw a number of material and coordinated actions announced by both policymakers and regulators around the world in an effort to bridge the uncertain (but real) economic impacts we currently face. While not expected to be the panacea to the problem, we believe they provide a platform for some improvement in market confidence.
We saw the Reserve Bank of Australia announce a range of incredibly accommodating policies:
- Cutting the official cash rate to its lowest possible level of 0.25%;
- Immediately commencing an unlimited quantitative easing (QE) program, targeting the purchase of Australian government bonds; and
- Offering both major and regional banks term funding facilities at the ultra-cheap 0.25% cash rate, on the basis the capital is on-lent to small-to-medium sized Australian businesses
In addition, Australia's banking regulator APRA, modestly (and notably only temporarily) relaxed their capital requirements for banks. This enables banks to release the liquidity offered by the RBA into the economy promptly and efficiently.
This approach, co-ordinated with our major banks, has seen small businesses and home loan borrowers, offered the ability to defer loan payments for up to six months, easing the cashflow squeeze.
State Governments have also chimed in, providing various forms of relief. The Morrison Government is expected to announce further stimulus this weekend.
Looking offshore, central bankers in Europe and the United States have also been busy deploying their 'cash bazookas' this week including:
- The European Central Bank's (ECB's) launch of a new €750 billion QE program, which seeks to provide European governments with the confidence to step-up fiscal stimulus efforts; and
- The Federal Reserve's cut to the USA's interest rates by a whole 1% point back to their lowest possible level of 0-0.25% as well as restarting their own QE program of at least US$700 billion.
We expect to see additional fiscal stimulus from each of the major economic regions including China.
The good news is that governments around the world have realised the potential severity of this situation and have the best minds working 24/7 to formulate responses.
Before materially re-entering equity markets, we would like to see clear evidence of the virus' containment. In addition, guidance on the impacts on future earnings from companies around the world would provide additional clarity.
We believe many of the announcements made this week to be positive incremental steps towards creating an income and liquidity 'bridge' for the global economy while it fights exponentially growing infection rates and awaits an eventual vaccine.
We retain our cautious approach to portfolio management, focussing heavily on cash and defensive investments while only looking to deploy into equities on an individual and opportunistic basis. We have been active in continuing to improve the quality of portfolios. This has included managing the hedging position in international investments, taking advantage on the depreciation of the Aussie dollar during this period.
Please contact us should you wish to discuss your portfolio or circumstances as we look to manage your capital through these uncertain times.