March 2020 intra-month performance update

18 Mar, 2020 in News by

In light of ongoing, and now truly historic levels of market volatility across all markets, we provide an intra-month update for March.

Coronavirus (COVID-19) pandemic fears continue to escalate causing an ongoing sell-off across global markets. Everything is for sale – stocks, credit, gold, commodities, currencies, and most sovereign bonds. Despite contracted virus cases tapering off in both China and South Korea, cases in Europe, America, and other parts of the world – still in the early acceleration phase – are causing global mass-panic. Co-ordinated containment efforts are seeing countries and industries shut-down. Markets are attempting to discount the economic impact, while concerns of another global financial crisis grow.

Performances to 18th March month-to-date include:

  • Global Large Cap and Small Cap Indices down -15% (S&P500) to -25% (Russell 2000);
  • Australian Large Cap and Small Cap Indices down -24% (All Ords AI) and -25% (Small Ords) respectively; and
  • The Paragon Australian Long Short Fund is down -13% net after fees, the fall driven by a continuing sell-down of our high-conviction longs, including gold stocks.

Gold, gold equities, and other safe-haven assets including Utilities, the Japanese Yen, and the Suisse Franc, are being sold down as a source of liquidity. US$ gold has corrected 8% from its recent intra-day high of US$1,700/oz, yet A$ gold continues to be unchanged and at record highs of A$2,550/oz.

Recent material positive catalysts which ultimately strengthen fundamentals for gold include:

  • The Fed surprised with another ‘out-of-meeting’ cash rate cut of 100bps, essentially cutting rates to zero last weekend;
  • The Fed announced another massive US$700b QE program to ease the financial strain on markets, ever-expanding its balance sheet;
  • The US is looking to pass a huge US$1.2tn fiscal-stimulus bill through Congress to combat the economic fall-out of COVID-19;
  • Ballooning twin deficits (government and trade deficits) in the US – currently ~7% of GDP and heading towards 12%, similar to 2011 when gold peaked; and
  • Other global central banks are pursuing similar steps as the Fed.

Given the magnitude of these catalysts for gold, we are firm of the view that US$ gold will break new all-time highs (US$1,921 intra-day high on 6/9/2011) eventually, leading to a re-rate in our gold stock picks. The bounce in gold equities globally over the last two days could very well be the start, yet the exact timing is difficult to predict given unprecedented levels of volatility.

We do not expect the COVID-19 market meltdown to become a secular bear market like the technology-bust of 2000-2002 or the GFC of 2007-2009. This pandemic is likely to be a temporary shock to markets and the global economy. In our view, the current virus-led bear market is cyclical and compares most closely to market crashes of 1987 (Black Monday crisis) and 1998 (LTCM crisis). Both of these were cyclical bear markets caused by events that led to quick sell-offs which bottomed in short order, with secular bull markets resuming. We estimate peak-virus ‘negative-news’ to be 3-4 weeks away – as the rate of change of contracted virus’ decelerate in the USA and Europe. Combining this with Central Banks globally looking to go ‘all-in’ in terms of fiscal and monetary response, once the COVID-19 pandemic subsides, there will be a powerful market recovery.

Today the Fund is ~40% in cash and ready to deploy capital. We’re particularly focused on the opportunities that the mass selling and illiquidity are presenting, along with extremely attractive valuations, in some cases similar to those at the depth of the GFC. Taking advantage of such mispricing, combined with applying a calm and measured approach to our investment focus, will allow Paragon to deliver exceptional performance in due course. It’s also worth noting that our key longs are all net cash, including our development stocks which have funding to see them through beyond 2020. Ie. there is no risk of a dilutive discounted capital raise.