Mar 19

Most markets are mostly efficient most of the time … maybe not so much now

Its clearly been a long time since I updated this blog and perhaps this current crisis makes most sense to make a comeback; particularly given I started this blog not long after the worst of the GFC (Jan 2009 to be precise).

Anyway, the current crisis has clearly required a global response to slow down the spread of COVID-19 because rapid global spread means the global health system collapses and many more people die, whether COVID-19 or anything else, than necessary. If the spread of COVID-19 continues to spread exponentially its only a matter of weeks before Australian hospitals will be unable to cope so here’s hoping we all take notice of our medical leaders and the spread slows sufficiently.

In terms of financial markets, the volatility across all markets is incredible, its horrible and includes some unexpected outcomes of which I’ll outline a few here:

  1. Gold hasn’t been the hedge to risk everyone expected … its down more than 7% in US Dollars and has performed worst in the wort of the equity markets

Gold USD - 19 Mar 2020
Source: Bloomberg

2. The 10 year Australian government bond (& other longer term Aussie bonds), is often an indicator of economic strength or weakness and has risen strongly over the last week or so … so much for its expected hedge to equity risk. Given Australia is facing its first economic recession since 1991 and given interest rates may be heading to zero, this is unusual and can only be explained by lots of foreign selling as the Australian dollar moves well below $0.60US.

Aust 10yr Bond - 19 Mar 2020Source: Bloomberg

3. If there is one industry where you would expect an increase in price during this horrible virus it is Healthcare. The following chart shows the MSCI World Health Care Index and its decline over the last month, whilst not as big as the MSCI World index, is still big at over 21% … this is possible some supporting evidence that diversification during stressed times can mean little within the asset class.

MSCI World Healthcare - 19 Mar 2020Source: Bloomberg

So the lesson from this is that just when you think your portfolio is diversified or you think you have picked the right bets at the right time, they still may move against your logic (or perhaps mine!). Many of us, thought bond yields would decline as equities decline, and perhaps gold would go up, and that a bet in the most in demand sector would be a sure thing … well it maybe not. Diversification across securities, sectors, industries, sectors, asset classes, currencies will be very important in these times but be very careful when it comes to making specific bets and ensure you stay within your risk budget.


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