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Coronavirus (COVID-19) impact on world economy

  • March 3, 2020

Statement by the Chief Investment Officer – Carlos Gil

Strong 1H20 reporting season but the market is Covid-19 focused

A strong first half FY20 reporting season across our domestic investment funds has been overshadowed by world equity market price falls instigated by the spread of the Covid-19 (the novel corona virus).

So, let us address how Covid-19 is likely to impact your equity investments.

Firstly Covid-19 is not a threat to civilisation or the societal and economic structures that underpin it. Its mortality rate is simply too low to materially impact the world’s population under a worst-case scenario of a mass unrestrained pandemic. Given we are long term investors and invest on a long term “buy to own” the businesses basis, this is the first and most important element we need to understand. Arguably it is the only element about Covid-19 we really need to understand.

So how will Covid-19 impact economies and society over the short term?

Sovereign states around the world are still working under a premise of containment. That is, they are implementing measures that are aimed at attempting to contain the immersion of Covid-19 within their population base. Their course of action may seem dramatic or even draconian in nature but contextually rational given the prize of a triumphant containment battle.

The duration of this phase may last several months and will cause some short-term disruptions to economies. This phase, no matter what happens in the Covid-19 containment battle, will not last indefinitely.

Post the containment phase the outcomes for Covid-19 will be binary but in any event likely to have a more muted impact on economic activity than the containment phase. Covid-19 will be either successfully contained or in the event of a global pandemic we will enter a minimisation of transmission phase. Under the latter scenario, sovereign states will focus their energy on minimising the transmission of Covid-19 amongst their citizens giving up on the concept of containment. Businesses and citizens will go about their daily rituals. We will learn to live with a new virus that may end up having a similar mortality rate to influenza.

1H20 Reporting Season

The investment management team saw positive intrinsic value growth across the domestic investment funds (Deep Value, Pure Microcap and High Income Microcap) with strong and robust earnings reported for first six months of FY20. Had the market not been distracted by Covid-19 investors this month would have seen this intrinsic value also reflected in marked to market price growth. The consequent fall in market prices has seen market pricing reactions for some companies become unruly, unjustified and disproportionate.

Successful equity investing requires a long-term focus of buying quality businesses with strong fundamentals that can compound earnings throughout the peaks and troughs of various market cycles. The troughs inevitably open windows of immense opportunity for the patient and astute investors.

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