InvestNow News – 13th Mar 20 – Pie Funds – CIO Report: earnings season overshadowed by coronavirus
6 Mar – CIO Report: earnings season overshadowed by coronavirus
Opportunistic buying on market sell-off
February was a tough month for the funds. Usually in February we see big movements in our Australian positions as they report their half-year results. This earnings season, however, was overshadowed by the spread of the Coronavirus outside of China. A number of companies used the reporting season update to give early indications of how they would be disrupted by Coronavirus. Some travel companies provided large profit downgrades, while other companies more indirectly affected by the manufacturing supply chain have not yet been able to quantify the impact.
Markets sold off heavily, especially smaller companies, with large price movements on little volume. The selling was broad based and even gold stocks, meant to be a safe-haven during times of turmoil, fell late in the month. We began opportunistic buying on the days where clear panic set in, especially early in the day.
Since month-end we have seen an emergency 50bp cut in interest rates in the US and a 25bp cut in Australia. Although positive for equity valuations (the equity risk premium – the difference between earnings yield on equities and government bond rates – is at levels last seen at the end of the 2018 market sell-off, suggesting equities are relatively cheap), it does raise concern whether economic growth is likely to be weaker than expected and that is why central banks are cutting rates aggressively.