Economy,  Life,  Stock Market

A Conversation Between Two Punters About Coronavirus

Reading Time: 2 Minutes

What’s up people!

Of course, the word on everyone’s mind is “Coronavirus”.

Boy, has the market been smashed!!!

Yours truly is staring down the barrel of some whooper losses.

Oh dear, oh dear.

So what to do? Should we sell? Should we buy? WHAT?

Well, I was talking about this with my e-penpal and thought it would be interesting for everyone if I shared our conversation.

I haven’t told my penpal, but I’m pretty sure he won’t mind.

TFS:

Thoughts on the latest?

Penpal:

This seems like the biggie I’ve been waiting for.

My mental model on this is based around:

  • Back in early Jan I was highly confident the virus would be spread worldwide. The nature of the virus (asymptomatic transmission, very infectious) combined with human and political factors means right from the outset slowing the spread was the most viable outcome (rather than confining it)
  • MINIMUM 9mth to develop vaccine, longer to produce. The experts say 12mth+, but this is a once-in-50-year style pandemic, so the world will pour resources into ensuring the process is expedited.
  • Recession in Aus is near certainty. Q1 2020 will be weak when the numbers come out (bushfires). Q2 will be worse
  • Oil crisis + COVID 19 + end of business cycle = Ouch
  • Significant impact in 1-2yr timeframe, but will be forgotten a decade from now.

Watch the U.S over the next month, which has handled this very poorly (under-tested, high out of pocket cost). Only just started scaling up the testing, but it’s too late. Areas like Seattle will probably need to be locked down once the case numbers explode.

The markets will grind lower.

I’ll be switching our superannuation to 100% aggressive first, then DCFing it

Your plan?

TFS: 

Hm to be honest I’m not too sure what to make of this. I’m still of the belief that as the Coronavirus has come out of nowhere, is what has rocked the markets so much. Uncertainty causes fear, which causes panic, which causes emotional selling. But I think there is so much more algo and index trading in the markets that volatility will probably remain for the foreseeable future.

I agree with you that the vaccine will be produced in 9-12mths, but I’m not sure how far the markets will drop during that period. The world economy is becoming increasingly more political – and I think that we will see a co-jointed effort from world leaders to do absolutely everything they can to buy themselves out of this mess. Kick the can down the road – it’s the political mantra right? Debts and deficits are someone else’s problem.

And yes, Aus will most likely drop into recession – the hole is surely too deep now to escape it.

But there are some wonderful opportunities on right now, like a friend was saying, just because a stock price drops 30% in a week doesn’t mean the company is suddenly 30% worse. Over-reaction at its best.

Incidentally, there are some companies now whose share price is BELOW that of GFC-levels. That to me, represents an incredible pricing mismatch. Because the GFC was truly scary, the entire economical system was staring into an abyss. This “crisis” you get the sense that a cure will eventually be found, and a turn-around will occur.

If you look at some of the banks, they are trading at a gross up yield of 10%+

QE or not, NIM compressions or not, for what is essentially as “risk-free” of a share on the ASX (surely big4 wont go under in Aus), you cannot find those numbers on the risk/reward spectrum anywhere else.

I think most of the selling is because there has been such a run-up in prices that people are sitting on monster gains, and now’s the time to bank some and sit on the sidelines.

And it’s times like this that I’ll try to remember Peter Lynch when he says something like there will be drops of 5-10% a couple of times a yr, 10-20% every 3-5yrs, 20%+ every 5-10yrs.

Like you, I am positioning myself, bought a little in the superfund yesterday, may continue to buy a little more as the market continues to drop.

More importantly, I’m pleased with my mindset – although I’m sitting on some hefty paper losses, I’m not panicking, but licking my lips at what is truly, a chance to make some decent coin.

Maybe it will translate into the property market in 9-12mths if it gets worse?

TBC…

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