As a company that rises and falls with the share market, what has the past month been like?
We’re almost counting days at the moment. The market peak was February 20 when we hit an all-time high so it’s turned pretty aggressively. The trigger was coronavirus but the market was pretty expensive so something was going to unwind it a little bit.
Coronavirus is a bit different from previous events because it’s a little bit out of everyone’s expertise – it’s not a financial crisis or a debt crisis, it’s a health crisis. Clearly it is of concern, you’ve only got to look at the number of corporates not travelling, it’s impacting people and that will impact the economy.
Is it a busy time or are you sitting back to see how it plays out?
We haven’t done a whole lot but we’re an equity manager so we need to be largely invested in the market. At the moment you don’t want to be in companies with stretched balance sheets because if things do get bad for a period of time you need to be able to ride it out.
From our perspective, trying to bet on what’s going to happen in the short-term with coronavirus is too hard because I don’t think anyone really knows. What we’re doing is going through our portfolio looking at what the sound businesses are and which ones are higher risk that might not have as strong a balance sheet and we’ve got to decide what to do with them.
How will superannuation be impacted?
If you’re in an accumulation phase it won’t look great – your balance of $500,000 might have just become $400,000 overnight and that doesn’t make anyone feel very good. But equally, the market was up 23 per cent last year so your balance of $400,000 became $500,000.
If you’re older and you’re in pension mode where you’re drawing down five per cent a year and you’ve got a lot of equity exposure then that’s probably a bit more problematic because you’re likely to be drawing down some of your capital as well. It’s very hard to generalise but clearly balances are down. Rates have been cut so people generally speaking have probably got more equity exposure than they would have had prior.
The market has really rallied since the GFC. We bottomed out in 2009 and the market has basically gone up for 11 years straight as interest rates around the world have gone down. I think people have forgotten that markets can go down so the past three weeks have been a real eye-opener for a lot of people including us in some ways – we knew the market was expensive but we certainly didn’t expect that sort of sell-off.
How long do you expect it will take for the market to recover?
I think we’re only in the infancy of coronavirus, it’s hard to know, I wish I had a crystal ball. It’s a moving feast but it does highlight that for all the work we do on company valuations and earnings, a lot of it comes down to sentiment and confidence.
What we don’t want to do is overreact to every headline.
In the GFC we saw market movements of this magnitude quite regularly but we saw them for different reasons – that was more about the freezing of the whole financial system and that type of fear. Even in the tech wreck there were big moves but they were more isolated to tech stocks. A lot of people aren’t directly invested in the market apart from superannuation whereas everyone has a view on coronavirus and that’s what makes this a bit different.
It’s just a matter of trying to work out what the riskier parts of the market are because we don’t know what’s going to happen. If it was an exact science then we’d all just be putting on one or two trades each day and living on the beach but unfortunately it doesn’t work that way.
It’s a time to be cautious and not panic. That’s not to say you shouldn’t be investing in things because there’s some good companies that are now going to be cheaper than they were a month ago. Have a think about what they do and if it’s a sound business now then it’s probably going to be a sound business into the future – they might have a bit of a speed bump but it’s probably going to be OK.
If you’re relatively young and think you want to invest on a 10-year view there’s probably some attractive entry points now but equally, things could get a whole lot cheaper in the interim.
With a market capitalisation of about $5.6 billion, Argo Investments was ranked No.2 in InDaily’s 2019 SA Business Index, which showcases the state’s top 100 companies.
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