EQUITY MARKETS UPDATE – 19 March 2020 After yet another incredible day on Tuesday, after the US market fell over 12% overnight the night before, the Australian market surprised everyone by rising 5%. There was plenty of evidence that investors are starting to cautiously sift through stocks looking for higher quality names that have been perceived to be oversold. Governments worldwide are now throwing everything at this, with border closures, flights cancelled (Qantas cancelling 90% of its international flights), businesses working remotely, and in many countries, stores, and restaurants and other “non-essential” forms of consumerism, are now closed until further notice. There is a real sense of panic now in government actions, and in equity market moves. That to me, ironically, is promising. This is when proper action is taking place to slow the spread, smooth it out, and make it more manageable for economies. That is when markets can slowly start to take stock of the carnage and start to look to see who is going to benefit from this. Things we know (or at least think we know):

· Unconventional policy measures are required, containing large measures of fiscal stimulus, and there is clear evidence that government are in the process of doing this.

· This could become a financial crisis if revenues keep falling, but unlike the GFC, it will have been brought about by the broader economy shutting down.

· The banks are in better shape, and better capitalised than prior to the GFC.

· Most countries will go into a steep recession of some duration as restaurants, shops, casinos, and many other businesses close for a period of time. It’s too early to tell if it will get worse but most people are guessing that it will.

· There may be some emergency capital raisings.

· Things will bounce back. Things we do not know:

· How long the spread of COVD-19 will last, and the resultant global recession.

· How long the markets will remain weak.

· What behaviours will emerge from this as a long term trend. So much of this depends on when the virus peaks world-wide, and what is the size and duration of the peak. Given how sharp this market downturn has been and the fact it has been event driven, the likelihood is the shape of the recovery is more likely to mirror the 1987 crash, not the GFC. The lesson of prior event-driven bear markets is that financial devastation ultimately allows a new bull market to be born. Consider the one-month decline of 19% sparked by the 1998 Russian sovereign debt default that was followed by a 28% rally during the subsequent six months. Or the 19% drop in 2011 during the Eurozone debt crisis that was followed by a 29% rebound in six months. These are important lessons which should not be forgotten. Precision is difficult in a volatile market with daily price swings of +/-5% and a VIX (Volatility Index) level of 75 (long-term average is 19). However, markets ultimately recover, because equity markets are linked to the earnings growth of the economy, which in turn is a function of productivity and population growth, amongst other things. When COVID-19 becomes less of a focus, these things will resume, investors will look for quality, and earnings growth. We are continuing to focus on these fundamental factors, because in times like these, fundamental analysis is even more important than in less volatile times. As always, if you wish to discuss further, don’t hesitate to call.