The looming recession or possibly the current one – we will find out when the numbers come in – is expected to be both deeper and broader than the global financial crisis. For Australia, we don’t have a China story to save us this time. In fact, China may have a disproportionately negative impact on our economy.
Simon Doyle, the head of fixed income and multi-asset strategies at Schroders, based in Sydney, told clients and other investors in a webinar last week that there was a “distinct possibility” that the economic recovery would not be a ‘V’ shaped curve, but rather more elongated or a ‘W’ or some sort of hybrid. The Nike brand ‘swish’ is a popular descriptor doing the rounds of funds managers as they look to predict the future.
Schroders was one of the first managers in Australia to develop a multi-asset strategy and funds. The Australian-built product was adopted by the firm in its other territories, such as the UK, where it is headquartered. Notwithstanding the political tug-of-war with Australia and China, the Australian equities market is showing more promise than most others, according to Schroders’ latest investor view.
After selling down Australian and other equities going into the COVID-19 crisis, Schroders has been recently buying Australian shares and making selective purchases in the corporate credit market. “But we have to be wary of complacency,” Doyle said. “The ‘V’ could turn into a ‘W’ very quickly… The path forward will be complex.”
The valuations of the big US tech companies, such as Facebook, Amazon and Netflix, are now above what they were before the pandemic was declared a pandemic. “But yesterday’s winners are not necessarily the winners going forward,” he said. “And the share market is not the economy. Those big tech stocks make up only about one-quarter of the economy. Most people are bearish on equities. Everyone’s short which means there are not many participants left to sell. We think this sentiment may have gone too far.”
Schroders’ lest preferred equities market is the US. “We think it will be a messy story this year,” Doyle said. It’s was a particularly bleak prospect for savers who are looking for income from their investments. “We don’t think that’s going to change anytime soon,” he said.
With respect to geopolitics, Australia seems to be caught in the middle of the big story between the US and China. Given 2020 is an election year for the US president, Doyle said there was the likelihood that the more pressure was put on Trump, the more likely he would double down on his actions. The anti-China sentiment in the US was bipartisan, he said.
In other asset classes, Doyle is cautious about corporate credit, although he has recently bought some high-yield debt. With currencies, it has “trimmed” its long position in sterling and added to its exposure in the yen. The firm would back its duration exposure. “The idea is to buy back some risk if we get the opportunity to do so,” he said.
– G.B.
