The European Central Bank is expected to deliver its own policy relief at Thursday’s scheduled meeting in Frankfurt, following Prime Minister Scott Morrison’s $17 billion fiscal package, which joins the Bank of England and UK Chancellor’s co-ordinated stimulus.
A painful session on Wall Street where the main indices fell 5 per cent on Wednesday revealed a more troubling undercurrent: bonds were selling off even though equities were falling. Ordinarily bonds rally when shares tank.
“Stressed players are funding redemptions and margin calls out of the most liquid and most profitable positions given how hard bonds have rallied,” speculated Angus Coote, executive director of Jamieson Coote Bonds. “What will happen when they are forced to sell their worst credit positions?”
A redemption is when a fund manager’s client asks for their money back.
As the fall in equities intensified towards the end of the local session on Thursday, bonds returned to rallying mode as the case for greater co-ordinated stimulus mounts.
Fund managers were optimistic that although the fiscal response has not been sufficient to arrest the equity market sell-off, it will have genuine results in the real economy.
“The cash handouts are the critical part,” said Paul Taylor, the manager of the Fidelity Australian equities fund. “It’s going to the right people who are going to spend it. It will achieve much more when we get the deceleration [in coronavirus cases]. I think people will then spend it more in the areas that are needed.”
Anton Tagliaferro, investment director of Investors Mutual, made a case for even greater fiscal support. He believes that conditions will normalise eventually and companies with strong balance sheets will survive the crisis.
“It’s a very severe market correction not dissimilar to 1987, September 11, the GFC. This is up there amongst those,” he said.
“Corrections tend to be an anticipation of what’s going to happen in the real economy. The market is anticipating that economic growth is going to slow severely and at this stage, the length and depth of that slowdown is unknown. The economic impact of the virus is real and it’s going to impact several sectors directly, real businesses, real cashflows. Then you have to be concerned about secondary impacts.”
Once those are understood, there is reason to be optimistic about quality companies. “I believe the government should do more for those sectors directly exposed,” Mr Tagliaferro said, citing education, airlines, tourism and hotels.
Auckland International Airport’s dual-listed shares were halted from trading as the airport operator considers whether it’s current earnings guidance still stands “given the impact of COVID-19 on the travel sector, and particularly global events that have arisen during the course of [Thursday],” the business said.
Earlier this week, Air New Zealand withdrew its guidance and Qantas amplified its strategic response to the virus outbreak including taking the axe to almost a quarter of its network and dumping a $150 million share buyback.
COVID-19 infections exceeded 125,000 worldwide and deaths topped 4600 on Thursday, according to Bloomberg.
“Markets are very focused on the US,” Fidelity’s Mr Taylor said. “If countries like the US works out similar to what a lot of other countries have been through, deceleration [in new cases] in the US could be three weeks to a month away. From a market perspective, over the next few weeks to a month you’ll start to see that deceleration, which will give the market a lot of comfort.”
The fund manager said all things being equal, once the outbreak is managed financial conditions are well suited to support a share market recovery. That could happen quickly, he added.
“After we get the deceleration [in coronavirus cases] I don’t think it would be that long before we get back there [to 7000 points],” Mr Taylor said. “From monetary and fiscal stimulus, you’ve got very low interest rates and people will then focus away from the coronavirus risk to the low cost of capital.
“I think people will move very quickly. And the other thing is the world is awash with money. If we move away from the coronavirus we’ve got a market that’s on a 4 to 5 per cent fully franked yield.”