History P2


Yesterday we penned a short note on history, looking at the mix of market movements (asset prices) leading into the GFC, and how it looks now.

Have a quick read of it, to help put this short note in context.


“Where to” from here. The big recessions (’01/02, ’07/08, ’20) all have drawdowns in the order of -c30-40%. The recession scares (’11, ’18) tend to be -c20%. That’s where we are now, down a little over 20% in international equities, matching the recession scare average.

If a recession actually sets in, you’d imagine another solid -10-15% on average.

Because there are so few historical examples (e.g. 10 recessions in 50 years) you get imprecise handwaving like that above.

But from a DAA perspective, it’s still pretty helpful, to get a sense of your downside, and what to do if those levels are reached, what it might imply for your allocations.

We are (in our balanced) sitting at 30% fixed income. Our cash balances are over 6.5%.

If we are in a recession, then government bond yields (Aussie, international) will continue to decline. They are already down some 75bps from the peak reached only a fortnight ago.

If we are in a recession, it is very plausible that those yields go back down to 2%, levels reached only a few months ago.

So what’s the point.

That would give us tremendous firepower to go and buy equities at what would be very attractive prices.

And on an ex ante basis, those forward looking returns are already reasonable.

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