Strange Times – 22.05.2020

Global Markets Wrap

Markets rallied strongly this week amidst rising hopes of the production of an effective vaccine. Donald Trump said that he had been taking hydroxychloroquine and that he was ‘doing just fine’. More shots were fired in the trade war as China abruptly changed the rule on iron ore imports and told some power plants to stop importing Australian coal. Prominent economist, Ross Garnaut, warned that Australia is uniquely exposed to a trade war and from closed borders. Bank regulator, APRA, instructed the banks to release billions of dollars of capital reserves to avoid the economy hitting a cliff when the JobKeeper stimulus package ends in October. The number of active Covid cases in Australia declined to just 502.

Irrational Exuberance or Cheap Bargains

Whilst stock valuations tell you nothing about the short term direction of a market, they are a useful long term guide. Following the rally from March 23rd, the S&P 500 is now trading on a forward price-to-earnings (PE) ratio above 21, the highest since 2001. Analysts are expecting profits to fall 21% this year and rebound 26% next year. This seems optimistic.

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Investors are throwing in the towel on ‘value’ stocks (those that trade with low PE ratios), piling instead into ‘growth’ stocks.

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The Monetary & Fiscal Response

Monetary – the world’s central banks have been quick to cut rates (see table below) and to buy bonds (QE) in an attempt to stimulate their economies. To date, this has been highly effective in propping up share and residential property prices. Cutting interest rates is not possible in Europe, where rates are already zero or even slightly negative. This week, Jerome Powell, the boss of the US Federal Reserve, ruled out negative rates.

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Source – Visual Capitalist

Fiscal – the Australian government has responded to the Covid crisis with fiscal policies that will add 17% to our debt/GDP ratio over the next two years. The graph below shows the US fiscal response and places it context of the last 100 years. It is simply breath-taking in its scale.

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The Coming Depression of the 1920s

Economist Nouriel Roubini provides ten reasons why he expects the world to experience a depression later this decade. They include rising government debt, the ageing Western societies, the growing risk of deflation, currency debasement caused by central banks trying to fight deflation, digital disruption causing long term unemployment, de-globalisation, a backlash against democracy, growing US/China hostility, a new Cold War and environmental degradation. Not the most uplifting of pieces (!) but a reminder that just buying stocks and bonds and holding and hoping is unlikely to be an effective strategy in the future.

Australia’s Broken Personal Insurance Market

Last week, we reported on the huge losses being incurred by Australia’s personal insurance firms. The table below highlights the extent of the problem.

There are four basic types of personal insurance product – they all have their place.

  • Income Protection insurance allows individuals to protect up to 75% of their salaried incomes for their entire working lives.
  • Trauma insurance pays out a lump sum in the event of a ‘trauma’ claim – typically a heart condition or cancer
  • Total & Permanent Disability (TPD) provides a lump sum payment in the event of an illness or accident that leaves the claimant unable to work again
  • And Life insurance pays the policy holder in the event of death

The industry has miscalculated on two fronts – poor actuarial assumptions and a sharp rise in mental health claims. The result has been double-digit policy price increases for the past five years. This year, insurance premiums are likely to rise up to 40%. This clearly can’t go on for much longer before consumers are priced out of the insurance market. This would be a tragedy as the products are so essential for the protection of wealth.

If you are working and under the age of 55, it is highly likely that you will need some personal insurance. Please do call your adviser to get some advice.

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8 Reasons Business has Little to Learn from The Last Dance

On Monday, one of the most compelling sports documentaries ever broadcast came to a thrilling end. I’m talking, of course, about The Last Dance, the story of Michael Jordan and the Chicago Bulls. In case you don’t know anything about it, see this two-minute video. As Jordan says, “Winning has a price. Leadership has a price.”

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It has sparked endless fascinating debates (if you like sport) such as which other athletes have similarly dominated their sports. We came up with this short list— Mike Tyson, Tiger Woods, Serena Williams, Michael Schumacher, Don Bradman, Wayne Gretzky and Messi/Ronaldo. But I’m sure you’ll have your own list. Earnest debate has ensued on what business can learn from Michael Jordan and the Bulls. The answer, I’m afraid, is very little. I hope you enjoy our article in Firstlinks on why sport is a terrible metaphor for business.

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