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The Curve and The Opportunity

March 25, 2020

The Curve and The Opportunity

The last month has seen the value of global equities decline by ~34%. The XJO (ASX 200 index) has fallen at record speed by (as of today) 2493 points or 34.6% in 33 days. Historically markets have always rebounded after a large crash, which presents opportunity. A significant part of a recovery will be linked to “The Curve” in recorded infections of COVID-19.

The last month has seen the value of global equities decline by ~34%. The XJO (ASX 200 index) has fallen at record speed by (as of today) 2493 points or 34.6% in 33 days. Historically markets have always rebounded after a large crash, which presents opportunity. A significant part of a recovery will be linked to “The Curve” in recorded infections of COVID-19.

There have been a lot of short-term market opportunities with the wild swings both domestically and internationally. For the purposes of this we will look at the rate of COVID-19 cases and the scope for opportunity in recovery.

On March 23rd we saw many Australian equities hit lows not seen since the GFC and in some cases for more than two decades.

The Opportunity

The opportunity will lie in getting ahead of a recovery and taking advantage of oversold and undervalued equities. As mentioned above, reading the curve will be key in identifying this opportunity.

What is the Curve?

The curve is widely shown as a line graph, similar to that of an equities chart, showing the rise or fall of infection rates and/or mortality rates. In quite simple terms, the goal of central governments is to bring the number of infections under control and flatten the curve. We have even heard this being referred to as “flattening the sombrero”.

With many countries implementing lockdowns with movement greatly limited, steps are being taken to reduce the spread. Considering the incubation period, lack of testing and late response, it can be argued that the rise in confirmed cases could have been affected by this lag in taking action. With current measures now in place, we can now start to accurately see if it they are having an effect.

The question is how this transcends into opportunity for investors. Chinese efforts to flatten their curve have been fruitful with the employees returning to work. It is also important to note that the Chinese government has not yet announced a stimulus plan. Given that western governments have already announced waves of fiscal and monetary support, a recovery could be sharp and rapid if the curve starts to flatten.

Below is a linear graph of total cases globally.

Source: Worldometer

Using linear graphs does not always give the entire picture. A logarithmic graph charts the data in increments of a tenfold increase on the previous level.

Source: Worldometer

When inputting data from Italy we are seeing signs of the curve potentially moving towards flattening. In the case of the US, where restrictions are only just starting, the increase is sharp.

Source: Worldometer

There is now increased understanding and impetus to tackle the spread of COVID-19 in economies like the US and other parts of Europe. The measures now being taken could see this curve begin to flatten and the start of a recovery.

Please call your adviser for further information.

 

 

Please note this is General Advice only and doesn’t take into consideration your personal circumstances, objectives, financial situation or needs

 

This article is provided by Reach Trading Premium, corporate authorised representatives of Reach Financial Group Pty Ltd who holds Australian Financial Services Licence Number 333297.

 

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