Market Bulletin - Coronavirus March 2020

Investment markets have dislocated in recent weeks, sent into panic by the global Coronavirus pandemic, and consternation about the extent of its effect on human health, consumer spending, economic activity and corporate profitability.

No one can predict the extent to which the disease will spread before containment, nor precisely the effect it will have economically.  But we do have experience in understanding and reacting to periods of significant investment market volatility, particularly shares, so we proffer these observations.

• Shares should be considered a long-term investment.  In time, share market indices will recover their recent losses and trade at higher prices.  Dividend amounts paid by some companies will be negatively affected, but many of them will also revert higher in time.  Often, when we look back at periods of significant volatility and decline, we find that some of the best buying opportunities are found at the zenith of the tumult.


• The mechanics of markets these days are driven by algorithmic and other forms of computerised or robotic trading.  The majority of stock market trades globally are executed in this manner.  Computer based trading, whilst good for efficient market pricing and liquidity in normal times, can have the effect of significantly amplifying volatility during periods of market stress.  Some of the very large swings in market values in recent days can be attributed to computerised trading, often without reference to the quality of the company being sold, or its valuation, and sometimes contrary to the views of the investors themselves.  Whilst frightening as it happens, this extreme volatility rarely lasts long, so we expect more normal market patterns to resume fairly soon.


• The economic effect of the Coronavirus pandemic is likely to be considerable in the near to medium term.  This is because the global supply chain has been interrupted, which in turn will affect trade, industrial activity, services and manufacturing.  Furthermore, consumer confidence has weakened which will affect retail sales and consumption activity for a period.  It’s likely that the Australia will suffer negative GDP in the March quarter, and perhaps the June quarter, which constitutes a technical recession.  Corporations by the dozen will be announcing reduced revenue, cashflow and earnings projections in the coming months, and many will announce lower profits when they report later this year or early next year.  Dividends for some companies will be reduced, and perhaps temporarily suspended for those companies more significantly exposed.  None of this is good news but is the likely reality.  It doesn’t mean investors should be exiting shares, it’s more about being circumspect.


• One of the certainties is that interest rates, almost everywhere, will be reduced to or held at close to zero for a considerable time.  This may eventually have a significantly stimulatory effect to shares and real estate.  Further, central banks and governments around the world have launched massive stimulatory programs, either by monetary tools such as interest rates and bond buying, or fiscally via various programs and incentives.  These will help stabilise the situation and support recovery in due course.


• The question of whether to buy or sell is oft asked.  At present we judge many shares to be considerably undervalued based on their reported and forecast earnings, but these projections don’t yet contain the unquantifiable economic and profit reductions that lie ahead.  Essentially, the timing of a share market recovery will be largely dependent on the period of the pandemic itself.  We’ll just have to wait and see. 


• We know that the concept of optimism leading to greed and pessimism leading to fear abounds in the stock market. When optimism becomes greed, some shares become significantly overvalued, and should be sold.  When pessimism transforms into fear the opposite prevails, and some good shares can be bought at bargain prices. 

We trust and hope that employees, clients, and associates of Joseph Palmer and their families and friends remain safe and well, and that this period of distress calms quickly.

Joseph Palmer will remain open for business as normal.  Should our office in Hunter Street Sydney need to be temporarily closed staff will still be contactable, and all have remote access to their respective tasks, whether it be trading, banking or administration.  We encourage you to use email to communicate with your usual Joseph Palmer contact.  The email addresses for each employee are listed below.

Yours Sincerely,

Malcolm Palmer

Email Addresses – Joseph Palmer & Sons, Sydney