History P2
Headlines
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.
Note
“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.
Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.
This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.
Please note that past performance is not a reliable indicator of future performance.
General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.
Taxation warning: Any taxation considerations are general and based on present taxation laws and may be subject to change. Aequitas is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and investors should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.