The blanket lockdown of whole communities, he argues, ignores the very stratified risks that communities run. Extremely low risk in the working age population against higher risk for those above 70. He notes that the data is most probably bad and questions what he sees as a lack of constant distinction between deaths from Covid-19 and deaths with Covid-19.

He estimates that the extent of infection is of the order of 10% in populations and most are either asymptomatic or mild. The corollary is that as testing ramps up the apparent number of cases also ramps up. A totally misleading interpretation of the data.

He foresees that there may be an extended period when the virus is active, but that with more nuanced and focussed public health policy the proportion of total deaths would be reduced to a small number. He also points to the extensive collateral damage to public health that has occurred as a result of the clumsy implementation of policy. The treatment may have been worse than the disease!

The data released by governments and health authorities does not really point to the nature of the disease so this analysis of the data by an eminent medical and public health professional is a valuable contribution. Could it be that massive and unnecessary damage has been done to economies?

Source: https://onlinelibrary.wiley.com/doi/epdf/10.1111/eci.13423

John P. A. Ioannidis is a Greek-American physician-scientist, writer and Stanford University professor who has made contributions to evidence-based medicine, epidemiology, and clinical research. Ioannidis studies scientific research itself, meta-research primarily in clinical medicine and the social sciences.

The post Covid-19 Public Health Policy Implications Commentary and Analysis appeared first on Private Portfolio Managers.

The Chinese economy is recovering very fast, with manufacturing output back to levels seen prior to the shutdown in January. Demand in exports may however be inflated by back orders, so we may see some weakness yet to come (export sector is now about 15% of GDP and 10% of employment). Stockpiles of key commodities have fallen rapidly to more normal levels and there has been strength in iron ore prices as Vale has been suffering supply constraints. Air travel is 50% below prior levels but up from the 70% decline in March. Service sector still well down as is consumer demand but it is picking up at rapid rate particularly at the high end; luxury car sales are above previous period last year.

The Chinese Monetary Policy Committee meets late this week and is expected to approve substantial stimulus to be directed in equal portions into infrastructure and support for consumers. The picture is one of a rapid recovery to date.

The question remains how quickly will a recovery occur in other developed economies. Jerome Powell, Chair of the Federal Reserve, observed that US downturn has been unprecedented in severity and rapidity; in a period of two months the unemployment rate in the US went from the lowest in 50 years to levels near that of the Great Depression, much of it concentrated in low income groups. He quoted that 40% of those earning less than US$40,000 had lost their jobs. He confirmed that the Fed would take whatever monetary policy actions were required and commented on the unprecedented levels and speed of fiscal policy stimulus passed by Congress.

In Australia, the rise in unemployment is nowhere near that of the US and our economy tends to move more slowly in both increases and decreases in activity. We are neither expecting as severe a downturn nor recovery. One thing that might be observed in this episode is that everything has moved more quickly than it was expected to at the time. Essentially the determining factor in this situation is a behavioural one – to what degree will confidence (which was shattered to the point of hysteria) return and pent up demand result in sales. The east Asian experience would suggest possibly quite quickly.

The speed of recovery is important for a number of sectors, most importantly the banking sector. A rapid economic recovery would make the provisions made in March look a little conservative and the level of capital quite comforting. One indicative set of data will be housing prices and we will report on trends and movements in this area shortly. If prices don’t decline substantially then the average bank LVR of 65% will make the loan books look quite secure.

We are being quite circumspect about predictions of great changes in behaviour as a result of the virus. The predictions of changes in supply chains may prove a little too radical – they may offer some comfort, but that comes at a cost and loss of competitiveness which could be exploited by competitors. It is all very well to bring supply closer to home, but the cost may be prohibitive.

I trust that you are also looking forward to restrictions easing, with schools and businesses reopening.

Warm Regards
Hugh MacNally,
Chairman

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There has been a gradual lifting of restrictions and a limited resumption of activity. Should this continue to go well then economic activity may pick up more quickly than had previously been thought. This is of great importance as it will limit the liquidity strains on businesses and individuals and consequently the extent of financing required by governments (which is in our view a long-term concern).

Quarterly reports are starting to come out in the US and these are showing dramatic reductions in earnings. We would expect that this will continue, with some exceptions, such as grocery and some online businesses such as Netflix and Amazon, for this quarter and the next. There will be little good news, but this is universally accepted. The extent of the earnings decline cannot be reliably estimated so we cannot be too complacent about share prices. There is wide conjecture about what shape a recovery might take but at this point the view is U shaped. We tend toward this view also.

To date the earnings reports have been in the finance sector and while earning has been sharply lower than previous quarter and mostly also against previous corresponding quarter there are no signs of balance sheet issues. As we have stated earlier, these companies went into the crisis with very strong financial structure in contrast to the 2008 financial crisis. If the view above proves correct we would expect that this sector will emerge in relatively good shape and in contrast to what the large falls in share prices would suggest.

Similarly, the core holdings in the portfolio, having strong financial positions, will also emerge well. It would be expected however that the earnings reports for most will be well below those of the last period of last year. Even in defensive areas such as healthcare and pharmaceutical we would expect pressure on earnings. We think that much of this is priced in the market.

Kind Regards,

Hugh MacNally
Chairman

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Reported new infections appear to be levelling off in developed economies. This now seems to be occurring in NY and California, two of the recent hot spots. European numbers seem generally to be going down. East Asian economies do not seem to be seeing numbers increasing again as a result of reductions in social restrictions. The two most important indicators, China and Korea, have had very low reported new infections for over a month. In emerging economies the numbers however are unknown.

A note on the new data

New infections are recorded as those testing positive, however, testing is not large-scale randomised testing of communities, it is largely those who present themselves for testing because they have symptoms. The virus is more widely distributed than the “infection numbers” indicate, it is just that some are unaware of infection because they have no symptoms or have symptoms are so mild that they don’t seek testing. Consequently, the mortality rate is lower (most probably far lower) than simply dividing the casualties by the reported infections.

It would also appear that the overcrowding of ICU units was at worst localised and temporary and is now dissipating. For instance, in NSW the number of Covid 19 patients in ICU is approximately 30 – a far cry from the hysteria that all 2,000 beds would be used by 6 April.

From an economic standpoint our view was that the critical factor was the time that economies would be restricted because that would determine that strain on the liquid assets of individuals and businesses. It would now seem that the more extreme time frames of six months or until a vaccine is produced is excessive. But it is probably too early to predict how long restrictions will last as it is in the hands of our political masters (if given free reign one would suspect that activity would now be picking up).

This has particular significance for the banking sector, where share prices have been particularly hard hit. We have put the view earlier that banks (in UK, US and Australia) went into the downturn with high levels of capital and strong lending books in stark contrast to the 2008 experience. If the winding back of restrictions starts to occur relatively soon we think that the discounts to tangible asset backing that they are trading on will prove excessive. We are expecting a further update prior to the banks half year announcements in a couple of weeks.

The Chinese economy is starting to grow again, with construction growing more than exports and consumer products. Cement volumes have picked up as have prices. Importantly for Australia, steel production is increasing and stockpiles of both iron ore and steel are decreasing. RIO and BHP are also benefitting from the supply issues of their major competitor, the Brazilian producer, Vale.

Manufacturing is one of the more mired sectors as a result of complex supply chains that have all to be re-started. The least effected in this are those with relatively few inputs and localised markets, such as James Hardie. Hopefully Boeing will be released from its 737Max grounding in the not too distant future (at least it won’t have an inventory problem), although its customers are in one of the hardest hit sectors.

It is difficult to identify any directly analogous situation which might provide some guide as to how events will unfold. Neither the 1987 or 2008 financial crises saw such a rapid and widespread decline in activity and employment. We have no real guide to how an economy that has been put in an induced coma will come out. One observation that we would make is that in the two instances mentioned above the financial systems were in awful condition. Lack of capacity to lend in the banking system is not part of the current problem.

The approach we propose taking is to hold sufficient cash to cover requirements during a period when dividends will be lowered or withheld and look for financially strong companies well placed in attractive industries that are selling at low or very low prices.

Kind Regards,

Hugh MacNally
Chairman
0455 455 277

p.s. The biggest casualty of the last three months has probably been the soothsayer. Predictions have been wildly inaccurate on both sides of the mark. Initially they were too low (ours included – perhaps comparisons with the 1918 influenza clouded the crystal) and then they were very much exaggerated. Even Byron Wien’s annual surprises are looking a bit below par this year – over a few decades Byron has had a pretty good batting average with some thoughtful predictions for the year ahead. The top ten are shown below for your interest.

Byron Wien and Joe Zidle Announce Ten Surprises for 2020

New York, January 6, 2020

1. The economy disappoints the consensus forecast, but a recession is avoided. Federal Reserve Chair Powell lowers the Fed funds rate to 1%. Without a comprehensive trade deal in hand, President Trump exercises every executive authority he has to stimulate growth and ward off recession. He cuts payroll taxes to put more money in the hands of consumers.

2. Inequality and climate change become important election themes, but centrist ideas prevail. The House of Representatives sends articles of impeachment to the Senate, but Donald Trump is not convicted or removed from office. Enough information is revealed in the proceedings to cause some of his supporters, as well as many independents, to throw their support to liberal candidates in 2020 state races. The Democrats take the Senate in November.

3. There is no comprehensive Phase Two trade deal that limits China’s ability to acquire intellectual property.  National interests result in the balkanization of technology. The development of separate standards for 5G and other tech hardware proves to be bad news for the future of world economies. The move toward “decoupling” gains traction in negotiations with China.  US economic co-dependence with China erodes. Both China and the US keep their hands off Hong Kong and let the protest settle down by itself.

4. The prospect of a self-driving car is pushed further into the future.  A series of accidents with experimental vehicles causes a major manufacturer or technology company to issue a statement that it is no longer developing self-driving technology.

5. Emboldened by the pain of economic sanctions, Iran takes advantage of America’s unwillingness to intervene and steps up acts of hostility against Israel and Saudi Arabia. The Strait of Hormuz is closed and the price of oil (West Texas Intermediate) soars to over $70/barrel.

6. Even though some observers believe valuations are stretched, a surge in investor enthusiasm pushes the Standard & Poor’s 500 above 3500 at some point during the year. Earnings increase only 5%, and S&P 500 multiples remain elevated because monetary policy is easy and investors become more comfortable that intermediate interest rates will rise slowly.  Volatility increases and there are several market corrections greater than 5% throughout the year.

7. Big tech companies face growing political scrutiny and social blowback. Once the market leaders, certain FAANG stocks underperform and the equal-weighted S&P 500 outperforms. A proposal to break up the largest social media platforms and increase regulation and government oversight gains popularity.  This has greater success than prior government efforts against Apple, Microsoft and IBM, because it has widespread support from the American people.  A millennial in New York City puts a phone down and makes eye contact with another human and finds it non-threatening and refreshing.

8. Having secured a workable Brexit deal, the United Kingdom turns out to be the winner in its divorce from the European Union. The equity market rises and the pound rallies. The UK benefits from a long transition period, and growth exceeds 2% as foreign direct investment resumes now that the outlook is clarified. The EU economy remains soft, and European markets other than the UK underperform the US and Asia.

9. The bond bubble starts to leak, but negative rates continue abroad. Even though the US economy is slowing, the 10-year Treasury yield approaches 2.5% and the yield curve steepens. Japan and China pull away from the Treasury auctions. Rather than economic fundamentals or inflation, supply and demand drive yields higher.

10. The problems with Boeing’s 737 Max are fixed and deliveries begin.  The plane becomes a mainstay around the world, enabling airlines to operate more efficiently and increase profits. The stocks become market leaders.

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The reported rate of new infection in developed Asian countries has remained low for the last week, as it was in the prior week. In Europe there are some signs that countries that were infected early, such as Italy, are starting to see moderation in the rate of new infection, but levels remain high. However, those where infection appeared later, such as Spain, are still experiencing increasing numbers of new infections. In the US the number of new infections is increasing and is at a high rate. Actions taken to bring the virus under control have been least effective there and as a result the infection and death rate are the highest experienced of any country so far. Australia is showing a decreasing rate of new infection, although medical authorities are still very cautious about the trajectory of infection rates. No meaningful data is available for emerging countries and great concern should be felt for their circumstance.

Over the last two weeks companies have been updating markets. Comments have by necessity been somewhat vague as little can be said definitively about earnings and a large number have withdrawn guidance. We would like to focus more on financial positions rather than near term earnings. Emerging from this period in a position to take advantage of opportunities we think is more important than speculation about the near term. We would like to start with the stocks and industries that the markets have the greatest concerns (correctly or otherwise) as indicated by the size of share price falls:

Banking Sector

The largest fall and concern, understandably, has been in the banking sector. The sector went into this crisis with strong capital and liquidity positions and high quality lending books (among the banks held in portfolios) and they are far better equipped to deal with the upcoming strains than in the 2008 crisis when their situation was mostly the complete reverse. The strains will be significant without doubt, but government liquidity support for their customers is also very significant. At this stage we would not expect the bank stocks we hold to have to go to the market for significant additional capital. This period will be a meaningful test of the concept of “unquestionably strong” which regulators applied to banks post 2008.

Retail

No exposure other than Woolworths and Elders, both of which have fared well in this period for different reasons, both are financially very comfortable and we do not have concerns.

Manufacturing

The companies held went into this period in strong financial positions. The high fixed cost have a negative effect on cashflows which is a concern the longer economic activity is very depressed and we are looking to position the portfolios for an uneven recovery.

Healthcare, Consumer staples, Telcos, Media and Technology

The stocks we hold in these sectors we are not too concerned about, the share prices have come down significantly less than the market and their revenues have been less effected. In the case of telcos their products are in very high demand!

The share price falls have produced some opportunities in stocks we have previously thought too expensive and we feel this will allow us to improve the underlying quality of the portfolio companies at significantly less cost than would have been the case in the past few years.
Should you have any questions please do not hesitate to contact us on (02) 8256 3777, or individually as per below.

Hugh MacNally, Executive Chairman: 0414 728 638
Peter Reed, Portfolio Manager & Director: 0455 455 277
Jill May, Senior Client Relationship Manager: 0412 033 359

Hope you are in good health.

Kind Regards,

Hugh MacNally
Executive Chairman,
Private Portfolio Managers Pty Ltd

The post PPM Insights: COVID-19 Implications by Industry appeared first on Private Portfolio Managers.

Increased restriction on movement and contact have been imposed in Australia over the last week. There are however some early signs that growth in new infections is slowing and if this persists it will be a very good sign which would indicate that the anticipated stress on the healthcare system will be less than was previously thought.

Infection rates in Europe and the US continue at high rates. After some indication that new infections were slowing in Europe they have resumed their climb. The US now has the highest number of infections globally and the rate is climbing. This most probably was as a result of a failure to instigate protective measures early enough.

In China there has been a relaxation of movement restrictions within Hubei Province, stranded residents are being allowed to return and residents of Beijing are being allowed to return but have to remain in isolation for 14 days. Now comes the critical question – will the infection numbers start to increase again. On this hangs the length of time that economic activity will remain at very suppressed levels.

If anything, the scientific language regarding the re-emergence of infection has softened slightly. From strong statements that the infection rate would return, views are now being couched in terms of it being unclear; a small shift in language. Last week we suggested that we would have an indication as to whether the infection would return from what was happening in China as it had at least partially restarted its economy. It is too early yet to make any definitive judgement. The infection numbers are still very low and reflect (infected) returning residents, however, the incubation period (about 14 days) has not yet been completed and the situation needs to be watched and the commentary from authoritative organisations monitored.

The situation in the US and Europe seems to be the worst and the furthest from resolution. There is great economic significance to this because of the size of these economies. It is not possible to make any meaningful estimate of length of time it will now take for these economies to bring the infection under control or economic cost of the failure to make early progress in containment. All that can be said is that it will be large; government debt levels will be very high and will need to be reduced post the end of the viral episode (hopefully one of the victims of the virus will be Modern Monetary Theory!) In a sense Australia may come out of this relatively well as government debt was initially low.

It is also too early to make too many predictions about how industries and economies will fare after the virus. What we would say is that financially strong companies and those well placed in their industry will be best placed to take advantage of new conditions. Every crisis brings opportunities and new ways of doing things, perhaps the lack of productivity growth that has plagued most developed economies for an extended period will get a boost (the reduction in Australia’s treacle like regulation would be a good start!).

Should you have any questions please do not hesitate to contact us on (02) 8256 3777, or individually as per below.

Hugh MacNally, Executive Chairman: 0414 728 638
Peter Reed, Portfolio Manager & Director: 0455 455 277
Jill May, Senior Client Relationship Manager: 0412 033 359

Hope you are in good health.

Kind Regards,

Hugh MacNally
Executive Chairman,
Private Portfolio Managers Pty Ltd

The post End of March COVID-19 Update appeared first on Private Portfolio Managers.

The isolation strategy seems to be effective, providing it is applied stringently and enforced. More time is required if the adherence is low, as it has been initially in the west. As pointed out below the economic issues are somewhat less easily dealt with if suppression of infection only works while isolation is in place.

A study by Imperial College puts the view that the problem is that while isolation will bring the infection rate down, until a vaccine is developed the isolation strategy cannot be relaxed for any period of time without the infection rate increasing again. The veracity of this view is now going to be tested in China, where the economy is restarting. This obviously entails a relaxation of isolation restrictions and it should be apparent in the next week whether Imperial’s analysis is correct or not. One can monitor this via the WHO daily Situation Report which details the number of new infections by country.

The other question is what is going to be the economic effect. Clearly isolating populations has an enormous effect on the level of economic activity. The initial problem is liquidity, that is access to cash. In the last week Governments have taken unprecedented measures to counteract this initial problem, by providing funding to both businesses and individuals. The funding of businesses and individuals has been massive and the indications are that this funding is effectively open ended.

One should emphasise that these unprecedented actions do come at a cost, and the cost will directly relate to the time that they are required to be in place. It is thus extremely important that infection does not re-emerge when isolation is relaxed. The infection rates in China, Singapore and Korea (where suppression has already resulted in only minor new infection rates) will be monitoring very closely, as they will give us a guide to the future path of the virus and ultimately to economic activity.

While no vaccine can be expected in the short-term, work is going on at a feverish pace. The improvement of treatment methods and the identification of existing drugs, that have efficacy, would be important if they can shorten the time patients spend using hospital beds, particularly ICU capacity in short supply.

The market falls are now similar to those of the GFC, however, unlike the GFC they have taken three weeks rather than 18 months. It should be observed that companies went into this situation in far better financial state than they when into the GFC. This is of significance, but it may take some time for any benefit to be apparent.

We will update you as developments emerge.

Please be assured that our staff are well taken care of with the majority working remotely.

Should you have any questions please do not hesitate to contact us on (02) 8256 3777, or individually as per below.

Hugh MacNally, Executive Chairman: 0414 728 638
Peter Reed, Portfolio Manager & Director: 0455 455 277
Jill May, Senior Client Relationship Manager: 0412 033 359

We are available to respond to your queries.

Take care and look after your health.

Kind regards

Hugh MacNally
Executive Chairman,
Private Portfolio Managers Pty Ltd

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