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The downturn we didn’t have to have?

Lex Hall  |  21 Mar 2020Text size  Decrease  Increase  |  
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Within the space of five days, the world—the western part of it at any rate—has been cleaved into two sorts of people: on one hand, those who can stay home to work; and on the other, those who can’t; those who, as a result of the (over)reaction to the coronavirus, risk being left idle by the measures to help curb its spread.

As markets plummeted this week, and Morningstar’s previously thin list of undervalued stocks swelled, many saw an opportunity to put idle cash to work. By the end of the week, however, thoughts of what to do with idle cash turned to the very real question of what to do with idle bodies. Will a wafer-thin cash rate of 0.25 per cent help?

Indeed, last week I feared I was being alarmist by raising the possibility of a recession. A week later, reputable money managers and publications are making utterances about a depression. Since 50 is apparently the new 30, perhaps depression is the new recession. Whatever the case, the collapse in global stock markets has been the swiftest shift from a market peak to bear territory. And if the west goes under, don’t worry about sending out the funeral notice. Mass gatherings are banned, remember?

Forgive the cynicism: it’s the job of doctors to overreact but the fear is that by stamping out a flu we maim the economy in the process. And no, it’s not a question of putting financial considerations before health—particularly mental health—concerns: any doctor, and, for that matter, any small business owner forced to lay off staff, will tell you the two are inextricably linked. Only time will tell whether the rate cut and bond purchases, together with government stimulus, will save small business and stave off a surge in unemployment. But we will pay for it. Expect a “coronavirus levy” on everything from here on.

Other problems loom, too. Most notably the ogre of corporate debt. As Peter Warnes put it in Your Money Weekly, “central banks are now realising, perhaps too late, that while they have used the tools at their disposal to pump up risk asset prices, similar tools may prove ineffective in creating the cash flows now so urgently required to service record levels of debt.”

Elsewhere over the course of this historic week, Morningstar researchers looked at previous downturns and recoveries. It may be cold comfort but just remember that panic is understandable in times of market turmoil, but investors who flee in such moments may come to regret it.

downturns and recoveries

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For those of you able to push a bit of the pile in, there are opportunities. We unfurled the new list of Australian stocks in five-star territory and looked at some healthcare names like Ansell and Australian Pharmaceuticals, which both carry low uncertainty ratings.

Glenn Freeman spoke with BondAdviser’s John Likos on the state of credit markets, particularly as US and European bonds tumble and investors wonder if cash is the only place to hide.

Morningstar strategist Karen Andersen looked at the economic impact and progress on virus treatments while Morningstar’s Christine Benz and Andrew Lill provided concrete tips on how to curb your losses and put your money to use.

Other essential reading includes Emma Rapaport’s guide on bear markets for those navigating their first slump. Investing is an emotional business so we again tapped Morningstar head of behavioural science Steve Wendel for his take and why we don’t just owe it to ourselves to stay calm as we weather the storm. We owe it to one another.

And in Firstlinks editor Graham Hand, who’s thawing out from a stint in Antarctica, talks to stalwart stockpicker Marcus Padley on why he’s not putting out his hand to catch the equity knife just yet.

These are trying times. But in the era of electronic trading, the snapback will be just as strong.

is senior editor for Morningstar Australia

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