Will COVID-19 hinder Australia’s 28-years long paradigm of uninterrupted growth? Is Australia about to face its worst recession since 1991? Can Australia do anything to prevent a recession?
From the federal government and the RBA to investors and common people, everyone is on pins and needles over Australia edging towards first recession in the last 30 years. Two months are about to pass since Australia observed its first coronavirus case and there is no sign that the nation is at the end of pandemic.
Amidst this scenario, billion dollars’ worth of investors wealth eroded from the Australian stock market in the last few days, with investors continuing to face bleak days of panic selling. Driven by heavy selling pressure, the S&P/ASX 200 index has plummeted by about 36 per cent in the last two months (up till 23rd March 2020).
Don’t Panic! Build Portfolio During Bear Market
Given the global panic sell-off triggered by Covid-19 fears and oil price war, investors may look at growth opportunities in a low yield world and value at the bottom.
The renowned American investor, Warren Buffett, has very well said, “A market downturn doesn’t bother us. It is an opportunity to enhance our ownership of potentially profitable companies with robust management at undervalued prices.”
It must not be forgotten that market corrections are indeed healthy sometimes, eradicating risks of overpaying in an investment. Investors can potentially hold on to defensive stocks, bring skin in the game and consider long term view amidst the current market correction.
Building a virus-proof portfolio by tapping opportunities in sectors not under a lot of pressure seems to be a wise idea amidst existing market volatility. Investors may look at:
- Growth-driven tech stocks, which may help beat the impact of coronavirus.
- Healthcare space boosted by virus cure/prevention race.
- Attractive real estate and utility stocks with good dividend stories.
- Supermarkets benefitting from panic buying.
- Travel companies , although facing headwinds from global travel bans, are implementing robust strategies to protect and grow their market-share to mitigate the risks springing up from the coronavirus pandemic.
- Banking and financial sector, although currently challenged by low interest rates, seems to be prepared for the adverse shocks having recently bolstering their core tier-I capital ratios to a minimum 10.5% and receiving liquidity and funding aid from government as well as central banks.
However, it is imperative for investors to beef up their portfolio considering strong fundamentals, robust balance sheet, decent cash flows, along with strategic optimistic outlook.
Healthcare player Zoono Group Limited (ASX:ZNO) has delivered a robust return of ~223 per cent in the last three months despite severe market fluctuations. However, one must take into account the Company’s overall fundamentals and adopt right timing approach before adding the egg into portfolio nest.
Investors may also think of parking chunk of funds in gold as an asset class, providing a hedge against current meltdown in equity markets. However, one must not overlook that gold also sometimes takes a backfoot amid global sell-off, as seen in the past few days; hence a balanced scenario is important.
Monetary and Fiscal Stimulus to Prevent Recession
Investors need not freak out, as the federal government and the RBA have fastened their seat belts to dodge the expected recession.
To cushion the economic impacts of the coronavirus pandemic, the RBA is trying every possible course to prevent a coronavirus-induced recession. In addition to lowering the interest rates to a record low level of 0.25 per cent, the central bank has recently deployed an extraordinary monetary policy measure, quantitative easing, which involves the purchase of government bonds in the secondary market.
Besides, the central bank has:
- Targeted the 3Y Government bond yield at 0.25 per cent,
- Introduced a 3Y term funding facility to support SMEs and provided $90 billion in funding to SMEs, and
- Increased exchange settlement balances at the central bank.
To ensure sufficient liquidity in the financial system, the RBA bought $5 billion worth of government bonds on 20th March 2020 and $4 billion worth local government bonds on 23rd March 2020.
On the fiscal front, the Morrison government has lately announced its second stimulus package worth $66 billion, which comprises relief package for retirees, along with a "safety net" for workers already carrying the load of the crisis.
Last week, the RBA and the federal government committed to inject $105 billion into the nation’s struggling economy to continue banks’ lending during the economic crunch.
In addition to this $105 billion injection and previous $17.6 billion package, the latest stimulus brought the total to ~$189 billion, which represents around 10 per cent of the GDP.
It is worth noting that the government and policymakers are activating every possible emergency measure to combat the baleful impact of the life-threatening disease. From prohibiting large public gatherings to imposing immediate travel restrictions, regulators are leaving no stone unturned to battle COVID-19.
May be its time for investors to harness the benefits of a market correction in the recession-pro scenario and tap this golden buying opportunity by adding companies with relatively strong fundamentals in their portfolio.
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