What does history teach us about the markets?

I reference here the last 102 years, and what has happened during and after these times.

SPANISH FLU

I go back this far, as many people are comparing the current COVID-19 situation to the “Spanish Flu” epidemic in 1918, where many more people around the world died, both in percentage and numeric terms died, more than what is expected from the current pandemic. The stock market, for 2 years from December 1917, rose by 80%, though it also marked the end of WW1, as referenced by stockinvestingtoday (Kusher, 2020) (The 1918-19 Bull Market, 2020).

SARS & MERS

In more recent times the world has experienced similar outbreaks to COVID-19, in the form of SARS & MERS. The relevant article, issued this month by the Economic Times publication (PTI, 2020), points out that the S&P 500 posted gains in excess of 20% in the 3 months following the World Health Organisation commencing investigations into the outbreak.

Like Harry Cator, from SGH and the Executive Chairman of DMP Asset Management,  (Harry Cator, 2020), I started in the Financial services industry in the late 80’s, and reflect his recent excellent observations, excluding WW2 impacts.

OCTOBER 1987

The largest one day fall in living memory. SGH note that “In terms of this COVID-19 correction compared to 1987 we are close to the bottom.”

DECEMBER 1989

The end of Japanese domination of world financial markets, where the Japanese Equity market PE was 60x. Current ratios are a fraction of this, with many major company’s PE’s well under 10 .

1989-91

Australia’s last recession, and CBA was yet to be listed, though the more common view at present is around the future of retailers. A property lead recovery followed.

SEPTEMBER 1992

George Soros took on the Bank of England, forced the British Pound out of the Exchange Rate Mechanism, and won in the market.

FEBRUARY 1994

The great Bond crash, when the US greatly increased interest rate, and taught investors for the first time that you can lose money by investing in Bonds.

JULY 1997

The Asian debt crisis, when ASEAN foreign debt to GDP exceeded 150%, and when the Asian Tiger economies lost their claws.

AUGUST 1998

The Russian Debt Crisis, where the termination of Long Term Capital Management, and where massively geared enterprises bought up illiquid Russian debt assets.

APRIL 2000

The Dot Com Crisis, where the NASDAQ plunged by 85%. I read recently that 5 months before the crash, Warren Buffett was criticised as “The King is Dead” as he didn’t participate in the mad, exuberant free for all in investments at the time – and history has shown that investment fundamentals are always essential.

DECEMBER 2007

The GFC, mainly caused by falling house prices due to a huge oversupply of new housing, and imprudent lending practices. It saw the US Equity market fall by 45%, with many global financial institutions going to the wall, and/or needing government bailouts.

AND NOW FOR THE COVID CRISIS AND HOW IT MAY PLAY OUT

I recently read a well-researched article by Michael Yardney (Yardney, 2020), written in the early stages of the COVID-19 outbreak. It covered in excellent detail how a strong change in sentiment was driving a strong recovery in property markets, after bottoming out in June 2019.

This change in sentiment was driven by a combination of lower interest rates, easier access to credit and increased certainty about housing taxation. It went on to say that many sellers will return to the market, and increase stock levels, however, some lenders are adopting stringent serviceability standards, which may limit some developers.

The article is now a few weeks old, but it referenced the following corporate commentary:

ANZ expected  a rise of almost 6% in 2020, raising their previous forecast of 3%,

Moody’s and Corelogic expected Melbourne and Sydney to be the best performing housing markets in 2020, and estimated Sydney property to jump 7.7% in 2020 and another 7.6% in 2021. And Melbourne to increase by 7% in 2020 and 7.8% in 2021.

Westpac Bank expects the price upswing to continue as deteriorating affordability caps gains and displaced demand starts to lift prices in other cities – with forecast price gains in the 5-10% range.

SQM Research’s annual boom and bust report forecast even stronger price growth for dwellings to rise between 7-11%, for a variety of reasons. Net overseas migration is forecast to average a net inflow of 243,000 people p.a. in the next 3 years, along with lower borrowing rates and overall enhanced affordability, hence their strong rationale in estimating these growth figures.

Cameron Kusher (Kusher, 2020) published an excellent, balanced article a few days ago, correctly referencing some potential short term volatility, but when considered with the strong positives already mentioned, that there should be a fairly swift rebound in property demand once the current situation has passed.

And Realestate.com.au published another excellent article on “How is COVID-19 impacting property market?” a few days ago, where they were optimistic about the effects of possibly less supply, and saw strong recovery prospects.

I searched last weekend’s Melbourne property statistics, with a mix of auctions and private sales, and it showed a clearance rate of 84%. (VIC clearance rate – 84%, 2020)

Another great article was written by Aidan Devine, from the Daily Telegraph, where he referenced Eliza Dunn, the head of research at Corelogic, (Devine, 2020)  with comments around how the housing and property market has a history of performing well after economic stocks, compared to the more volatile share market. I like their research, as they do point out that in the 1990’s recession, prices temporarily fell by 4.4% for a few months before it recovered, and also in the GFC, how the market briefly declined 7.5%, again before a strong recovery.

Corelogic collaborated with Aussie in presenting a 25 year history of property values in Australia, and, year in, year out, the Melbourne market increased by 8.1% p.a. over this 25 year period.

And, finally, I’ would like to reference Dr Shane Oliver, Chief Economist at AMP Capital, who published another great article (Oliver, 2020), “The threat to Australian House prices from Coronavirus”.

It is another great article, and for me the takeaways are:

• A relatively short recession that may set prices back 5% or so after which prices would bounce back.
• That the combination of low rates, solid population growth and the fear of missing out would still see solid price growth this year.

HOW TO NAVIGATE THROUGH THIS MARKET

Harry Cator covers this succinctly in his article (Harry Cator, 2020), and suggests the following:

• Understand the causes of the crisis as best you can
• Establish triggers/markers to guide you through the fog of fear
• Communicate your understandings with all stakeholders, and establish triggers
• Execute on your views, research, values and intuition.

So, for Investors who are relying on the security of 60%+- LVR’s with current and future projects, and also for Developer clients and their funders, who are needing long term capital growth, the case to hold and even top up is very positive.

Greg Roberts
Managing Director of ADCSA (Aged & Disability Care Specialist Adviser)

BIBLIOGRAPHY

Bell, M. (2020, March 03). Cut in interest rates by Reserve Bank Australia unlikely to greatly impact market.Retrieved from Realestate.com.au.

Devine, A. (2020, March 18). Coronavirus: previous economic shocks reveal likely pandemic impact on Aussie housing. Retrieved from realestate.com.au.

Harry Cator. (2020, March 27). Coming Full Circle. SGH . Melbourne, VICTORIA, Australia: SGH.

How is COVID-19 impacting the property market? (2020, March 26). Retrieved from www.realestate.com.au.

Kusher, C. (2020, March 25). What to expect from the property market amid COVID-19. Retrieved from www.realetstae.com.au.

Oliver, D. S. (2020, March 19). The threat to Australian house prices from Coronavirus. Retrieved from www.amp.com.au.

PTI. (2020, March 4). History repeats itself: World failed to learn lessons for coronavirus fight from SARS & MERS outbreak. Retrieved from economictimes.com.

The 1918-19 Bull Market. (2020, March 30). Retrieved from stockinvestingtoday.

VIC clearance rate – 84%. (2020, March 28). Retrieved from www.realestate.com.au.

Yardney, M. (2020, January 4). Latest property price forecasts revealed. What’s ahead in the next year or two? Retrieved from www.propertyupdate.com.au.