Archive for category: News & Insights

This document provides subscribers an up-to-date view on how products in general are responding to the COVID-19 induced correction. It includes a range of high level discussions such as market watchpoints and comments on all headline sectors. There are also performance snapshots for the period from 20 February to 16 March 2020 giving an early preview into the scope of the March numbers. Notably, Lonsec analysts are maintaining regular contact with fund managers and have heightened their surveillance during these volatile times.

Generally, we expect ETFs to trade close to their net asset value (NAV) due to the redemption mechanism that allows authorised participants to arbitrage between the ETF shares and the underlying shares.

However, in this recent period of heightened volatility and dislocation due to COVID-19, a number of ETFs have been trading at significant discounts, especially fixed income ETFs with large allocations to credit and high yield.

At the market’s close on 18 March, some of these discounts had narrowed to a small degree, but still ranged from -2% to -8%. The main issue is been the disruption to price discovery as credit markets have come under heightened stress, especially in the wake of the heavy falls in oil prices.

On the global equity ETF side, there has also been evidence of enhanced spreads immediately after US futures markets going into ‘limit down’ after breaching the -5% limit. The reason is that, due to time zone differences, market makers need to use futures markets as proxies when regional markets are closed and the ASX is open.

Without the S&P 500 futures markets to use as a proxy, market makers cannot effectively hedge their risk premia and need to use less-than-perfect proxies, exposing them to basis risk. This then narrows as regional markets open.

As a general observation, though, it’s fair to say that the local ETF market is holding up reasonably well in what has quickly turned into a severe market dislocation event. Markets such as these also shine a light on the golden rule for ETF liquidity, which is that the more liquid the underlying portfolio, the greater the efficacy of market making activities.

For example, cash and enhanced cash ETFs (such as BILL, AAA) are trading at NAV and have had basis point spreads, and large ASX ETFs have also been trading very well from a spread perspective. Importantly, while it is hard at present to gauge how long markets will stay volatile, the discounts and spread volatility should ease as markets normalise (whenever that might be).

The final point is that T+2 settlements for ETFs are very valuable in a ‘cash is king’ market such as this. This, along with the efficiency in implementing trades, has no doubt been behind the strong trading volumes we have seen, especially in larger ETFs.

Sadly, the title of our Symposium now seems all too prophetic.

Following the advice of the Australian government and health authorities, we’ve decided that the best option is to cancel the event.

Over 900 people were already registered to attend, but we all need to help ‘flatten the curve’ and prevent the spread as much as we can.

At this stage we’re not planning to re-schedule, but we’re working to make the content available to everyone who registered. We’ll provide further information on how to access these materials as it becomes available.

Who knows, we may all have plenty of time at home to watch and read!

We’d like to thank our event sponsors, AllianceBernstein, Fidante, Fidelity, Investors Mutual, Legg Mason, Pendal Group, Schroders and Talaria, and we look forward to continuing to work with them to keep you informed.

Feel free to put the Lonsec Symposium 2021 (Thursday 29^th April 2021) in your diaries, and we look forward to seeing you all there, if not before.

It has been a turbulent start to the year with Australia beginning the recovery process from the tragic bushfires followed by the threat of a global pandemic with cases of the coronavirus increasing across the globe. Despite these events markets did not flinch in January, with equity markets generating strong returns for the month as liquidity conditions continue to be supportive of markets.

If we look at previous incidents of viral outbreaks, such as SARS in 2003 and H1N1 (swine flu) in 2009, short-term corrections were within the range of 5% to 15%. These corrections were followed by strong rebounds. The consensus view is that global growth will be down in the first quarter of the year as a result of the coronavirus with the key variable being how long the threat of the virus persists.

While history is a useful guide in this case, it must be said that the effect of this epidemic is likely to be greater given China’s dominant presence in the global economy, given the faster spread of the disease and the measures taken to combat it. The extended closure of Chinese industry, restrictions on people movement, disrupted supply chains, declines in key commodity prices, bans on Chinese travel and the flow-on effect to confidence will severely hamper growth in China and the countries and regions most heavily reliant on China.

While at the time of the SARS outbreak China accounted for around 9.0% of global output on a PPP basis, it now accounts for 19%, and this proportion is only likely to increase in coming years, according to the IMF. China accounts for 18% of global tourism spending (up from 4.0% in 2008) while overall tourism (domestic and global) spending accounts for more than 10.0% of Chinese GDP and has been contributing almost 1.5% to annual GDP growth. To place China’s emergence on the global stage into perspective, in 2003 there were 20 million Chinese overseas visits and in 2018, 150 million. The Chinese economy accounted for about 30% of global growth in 2019. So a drop in Chinese GDP growth to 5.0% for the year, assuming the virus is contained within a short period, would detract 0.2–0.3% from global growth.

China now accounts for around 19% of global output

Source: IMF, Lonsec

From an Australian equities perspective, we are likely to see earnings outlook downgrades across a number of sectors, at a time of elevated valuations and a sub-par growth outlook. While earnings across the Healthcare, Consumer Staples and Infrastructure sectors should be relatively immune to recent events, based on Lonsec’s initial estimates, 2020 earnings estimates for the Resources (Energy, Iron Ore and Copper), Tourism/Travel and Consumer Discretionary sectors are likely to see significant one-off earnings revisions, capturing the impact of the coronavirus outbreak and the recent bushfires across Australia. However, such downgrades are unlikely to impact the long-term investment thesis for most companies and should be regarded as short-term headwinds, reflecting a series of one-off unfortunate events.

From an asset allocation perspective, Lonsec’s multi-asset portfolios remain very well diversified with only a small direct exposure to Chinese equity and bond markets. Consequently, our current focus is on the flow on effects that a sustained slowdown in Chinese growth may have on the domestic growth outlook given our close trading ties. As previously noted, our valuation indicators for Australian equities remain elevated, making them susceptible to a pullback should Chinese authorities’ attempts to stabilise growth fail. We have maintained our slight underweight positions in both global and Australian equities for the time being, however continue to monitor events closely.

While there is a high degree of uncertainty regarding the coronavirus outbreak, Lonsec notes that this event does pose a long “tail risk” for global markets should the outbreak get out of hand. These factors make it a challenging period for investors, where factors other than fundamentals are having a material impact on the trajectory of markets. In such an environment, we believe selective valuation opportunities will present themselves for long-term investors, however ensuring that your portfolio is diversified will be very important in navigating an increasingly volatile market environment.