What’s really infecting markets?
Can you see how coronavirus can be contained? Let’s think practically about this, especially in light of the revelation that the incubation period may be longer than two weeks and is infectious before symptoms present.
Even if Australia has banned inbound flights from China, many other countries have not. The virus will spread to those countries. And attempts by those countries to enforce lockdowns as strictly as China are bound to fail – just ask the relaxed Italians! Consequently, infected Chinese passengers can travel to other countries where people they come into contact with are permitted to travel to Australia. Additionally, the limited infections being reported by Vietnam, Cambodia and Indonesia are suspicious and we aren’t banning travellers from those countries.
In the absence of a vaccine or warmer northern hemisphere temperatures slowing its spread, a Covid-19 pandemic is probable.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
matthew russo
:
Hi Roger
Do you think this risk of a financial crisis is somewhat mitigated by the fact the Federal Reserve and Governments around the world are alive to the fragility of the financial system and will respond immediately with additional stimulus like they have shown recently? The Federal reserve may even consider purchasing corporate debt to provide additional liquidity (if they are not already doing this).
I have a personal view that we will not experience a financial crisis with monetary policy as accommodating as it is today and (has been for a number of years) despite the number of “scares” we have had during that time. Each time we get through one of these events it further confirms my view that we will not experience a financial crisis until we experience market euphoria, interest rates rise to more normal levels and complacency sets in once again.
The Coronavirus is perhaps the strongest test of this hypothesis to date.
Roger Montgomery
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I tend to agree however there is also that growing realisation/awareness that monetary policy is less and less effective at protecting the economy and investors! January price action looked like euphoria to me.
paul norris
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How do you insure others money you are investing, in companies in a country that has “…some of the highest levels of corruption in the world”
Roger Montgomery
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There’s a spectrum Paul.
Pascal
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Hi Roger,
This comment is not to do with the article but I couldn’t find another way to reach you. I am a regular reader to your blog, and every now and then post a comment for consideration. I am also an investor in the MGOL fund listed on the ASX.
I am hoping you can help clarify some things and maybe even write an article on it. However, I have a question regarding valuations and company financial metrics reported and disclosed. So here goes.
Companies seem to disclose information in such a way as to ensure that it is favorable to the authors (that is, management /exec/boards). The key metric I look at when valuing a business is ROE. However, I see a look of businesses report on RONA and present that to investors as the key KPI. I prefer ROE as this tells me how profitable a business is for the owner of the investment based on the amount of investor money ‘put in’ and ‘retained’ to generate said profit. (I have read your book. Best investment book I have ever read, so thanks very much!)
RONA on the other hand seems to consider the net profit as a percentage of fixed assets + net working capital. But NWC only considers current assets – current liabilities. The primary differentiator being the long term debt held by the company.
Just wondering if you could comment on the above. If there is an opportunity, could you prepare an article highlighting to your followers and fellow investors about some of the pitfalls, considerations and lessons learnt that should be made when reviewing reported financial information. I am sure you have written one before, but with reporting season ahead it would certainly be welcome.
Thanks again and keep up the good work. Regards, Pascal.
Roger Montgomery
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Thanks Pascal. Will definitely get something to you.
Austin Gan
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Hi Roger,
Thanks for this insightful post. As a novice investor i’ve recently been thinking, for businesses to suffer 20% revenue lost a month will very quickly turn into insolvency crisis, now it’s great to read it from you.
Would you elaborate a little bit, is there an easy way for the public to track credit spreads? Are they the same as how you track 3yr bond vs 10yr bond?
Also, would interest rate cut help this time around?
Regards,
Austin
Roger Montgomery
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Hey Austin, The St Louis Federal Reserve have a chart that you can use to track it but it can be a little lagged. You can also see if the ProShares Short High Yield ETF (NYSE:SJB) and the iShares iBoxx USD Investment Grade Corporate Bond (NYSE:LQD) help.
John
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Roger, my reading of this situation is that Corona-virus situation has been a substantial shock (which is still unfolding) that will expose what has been widespread chicanery. In relation to market, perhaps the falls will continue but as Buffet says, its time like these when you discover who was swimming naked. If this epidemic turns out to be really bad – say the virus mutates to something worse, or there is a secondary black swan that occurs as a result of it then the question that arises is will the world return to normal or will there be a rupture that leads to real reforms? The point I making here is that crises can in the long run have unintended positive outcomes.
Roger Montgomery
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That’s the way capitalism is supposed to work; Excesses and resource misallocations lead to losses and bankruptcies and new buyers/owners emerge with lessons learned and able to buy the assets at much cheaper prices etc etc.
Austin Gan
:
Hi Roger,
Thanks for this insightful post. As a novice investor i’ve recently been thinking, for businesses to suffer 20% revenue lost a month will very quickly turn into insolvency crisis, now it’s great to read it from you.
Would you elaborate a little bit, is there an easy way for the public to track credit spreads? Are they the same as how you track 3yr bond vs 10yr bond?
Also, would interest rate help this time around?
Regards,
Austin
Roger Montgomery
:
I hope I have answered this in your other post Austin.