Switzer on Saturday

Ignoring COVID-19 might be bad for our portfolios

Founder and Publisher of the Switzer Report
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The Yanks continue to keep their cautiously relaxed attitude to the Coronavirus (now tagged as COVID-19 in some quarters, including China). Europe’s stock markets are showing more fear around the virus but Wall Street is more focused on earnings season that continues to impress.

That said, maybe US stock market indices would be higher, if it wasn’t for the impact of the virus on future sales, profits and growth calculations of affected companies and economies. Overnight, the IMF chief, Kristalina Georgieva, says the next two weeks will be critical for getting a handle on how the virus will impact economies. Over that period, Chinese factories will reopen and it has just been made public that Apple will reopen its five stores in Beijing today.

How the virus count reacts to the attempts to embrace normalcy will become the ultimate test. If China and the world get lucky, then Wall Street’s optimism over the virus will prove to be a very good play. I don’t want to think of the alternative but we will be constantly monitoring the challenge.

And one additional challenge is China’s lowly-regarded statistical reporting reputation. We often doubt many of its economic readings that seem to arrive faster than most and seemingly pretty close to official forecasts. Well, its counting of fatalities has a few problems as well, with 108 deaths removed from the overall total that is now 1,380, after it was discovered there had been double-counting.

Ms Georgieva did caution us from getting too positive too fast, reminding us that China was only 8% of the world economy when SARS hit in 2003 but now it’s 19%.

Back to Wall Street and indices are down but not by much ahead of the close, though that could change. As I said earlier, reporting season is the big influence on stocks right now and with around 77% of S&P 500 companies already reporting, FactSet says 72% have beaten analysts’ expectations.

To the local stocks story and reporting season has been a help, with some of our best companies outperforming. The S&P/ASX 200 was up around 1.5% for the week and finished at 7130, which is two points below its all-time high made in January this year.

This is a huge effort considering our economy and many of our important companies are strongly linked to China. A day after JB Hi-Fi reported better than expected, the big story was the demand and supply chain concerns for the likes of JB and Harvey Norman because of the Chinese factory closures and travel bans in China and in places like Australia.

You have to hope the complacency about how the Coronavirus will bite is right, with, at long last, financial stocks having a great comeback this week, led by the CBA’s profit-showing. CBA was up 7.3% for the week and NAB 5.5%, with the latter also giving the market a better quarterly earnings update. Challenger also had a solid week, rising 13% after an analyst-impressing report on the company’s progress.

On the other hand, the company with real China problems is Blackmores, which has lost a lot of its “suitcase trade”, with the ban on Chinese travellers. But that’s not all. It also has a factory problem and a 48% slide in profit has meant that the dividend is scrapped!

The sectors that haven’t ignored the Coronavirus were IT, down 0.07%, materials off 0.8% and energy 1.42%. But as you can see, these aren’t big drops.

This stock market performance is creditable, given the fact that someone like AMP Capital’s Shane Oliver thinks the virus on top of the bushfires will hurt our economic growth. “For Australia, our assessment remains that the combination of the drag from the bushfires and coronavirus will detract around 0.6% from March quarter GDP, which will see the economy go backwards by around -0.1%,” he revealed in his weekly update on Friday.

What I liked

  • The NAB business confidence index rose from -2.5 points to -0.8 points in January but the long-term average is +5.8 points. Business conditions index fell from +2.7 points to +2.6 points in January, which is statistically nothing but the long-term average is +5.7 points. (I like the trend for business confidence but the level is still too low.)
  • The Luxury Car index has risen for the seventh straight month and is closely linked to rising house prices.
  • The Westpac/Melbourne Institute survey of consumer sentiment index rose by 2.3% to 95.5 points in February but consumer sentiment is still below the longer-term average of 101.4 points. A reading below 100 points denotes pessimism.
  • The value of purchases made with credit cards rose by 0.1% in December, to be up 3.7% on a year ago. And the value of debit card purchases rose by 3.1% in December, to be up 13.7% on the year.
  • The value of home loans rose 4.4% in December, with owner-occupier loans up 5.1% and investor loans up 2.8%. (The average new mortgage stands at a record $497,900.)
  • Owner occupier first home buyer loan commitments accounted for 30.2% of all owner occupier commitments (excluding refinancing), in original terms and this is an eight-year high.
  • This from Fed boss Jerome Powell, who said: “There’s no reason why the current situation of low unemployment, rising wages, high job creation – there’s no reason why it can’t go on”.
  • The NFIB Business Optimism index in the US rose from 102.7 to 104.3 in January (forecast 103.4).

What I didn’t like

  • US stocks slipped during the week, as investors came to grips with a new methodology for measuring coronavirus cases. The new method shows a large jump in cases, mainly in Hubei province, centre of the outbreak. China is supposed to be famous for creating Chinese students who are unbelievably numerate! So how do these errors happen?
  • The US Federal Budget was in deficit by US$33 billion in the latest week, while the forecast was US$11.5 billion, which looks like a big miss!

Millennials miserable

CommSec economist Ryan Felsman came up with a catchy headline this week that said: “Millennials Miserable!” The news for the story was that the Westpac/Melbourne Institute survey of consumer sentiment included a breakdown by age group. Sentiment for 18-24 year olds fell by 5.2% in February, to be down by 11.6% on the year. And confidence for 25-44 year olds fell by 5.5% to be down 9.3% from a year ago. Sentiment for 18-24 year-olds is at 21-month lows and 2½-year lows for 25-44 year olds.

When I mentioned this to a young person, Bridget, who was setting me up for my Friday business report on Sky News at 7.15 am, I told her about the report. Thinking that she would have better insights than me on this subject, I asked her why her cohort was so negative now?

Was it unemployment? The cost of housing? The bushfires? The demands of employers? The threats of the Coronavirus?

She laughed and said: “Oh, that’s because we are going back to uni after a long holiday!”

How out of touch we economists can be.

The week in review:

On our YouTube channel this week:

Top Stocks – how they fared:

The Week Ahead:

Tuesday February 18 – Reserve Bank Board minutes
Tuesday February 18 – Overseas arrivals/departures (December)
Wednesday February 19 – Wage Price Index (December quarter)
Wednesday February 19 – Skilled job vacancies (January)
Thursday February 20 – Employment/unemployment (January)
Thursday February 20 – Average Weekly Earnings (August)
Friday February 21 – CBA Purchasing Managers (February)

Tuesday February 18 – US Empire State manufacturing (February)
Tuesday February 18 – US NAHB Housing market index (Feb.)
Wednesday February 19 – US Housing starts (January)
Wednesday February 19 – US Producer prices (January)
Wednesday February 19 – US FOMC meeting minutes
Thursday February 20 – US Philadelphia Fed index (January)
Thursday February 20 – US Leading index (January)
Friday February 21 – US Existing home sales (January)
Friday February 21 – ‘Flash’ IHS-Markit Purch. Managers (Feb.)

Food for thought:

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch, as quoted by Charlie Aitken this week. 

Stocks shorted:

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.

Chart of the week:

As the coronavirus outbreak continues, AMP Capital’s Shane Oliver shared the following chart looking at how the All Ords has responded to major incidents since 1900:

Top 5 most clicked:

Recent Switzer Reports:

Monday 10 February: DOG stocks & 4 stocks that could break reporting season

Thursday 13 February: Should you sell out and rotate to out of favour sectors or stocks?

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.