Update

Corona Recovery Now in Doubt: What We’re Buying and Why

It’s not a bad way to spend an evening. Warren Buffett has a Coke. I have a Portuguese red and a small cheeseboard. The fire is blazing in our living room. My wife is reading her novel. She looks up and asks why Warren’s voice on the screen sounds scratchy?

I explain to her that he’s 89 years old. Has been investing in the markets for 78 years. And drinks Coke.

Source: Bloomberg

This year, the Berkshire Hathaway [NYSE:BRK.A] AGM was virtual-streamed for the first time in its history. I have recently become a shareholder. Not of the A shares which today trade around USD $270,000, but the B shares [NYSE:BRK.B], which you can pick up for around $180.

Although B-shareholders cannot vote, they can still get up to 4 guest passes to attend the real meeting (when it runs again). These guest passes are often sold on the secondary ticket market.

Berkshire-B

Well, this is not an official recommendation. But you may find benefit in acquiring some Berkshire-B shares. For a start, it will give you the option to attend the meeting in Omaha — investment education gold. And the stock itself could be up to 27% undervalued based on intrinsic value analysis.

Yet we won’t be monitoring it here. Although it’s America’s #1 retirement stock, it doesn’t pay a dividend. And its sheer fund size means it could struggle to meet our growth goals.

Warren Buffett is sitting on a war chest of cash

He began talking about the Great Depression. How it took 20 years to recover its pre-market value. Now it seems he’s waiting for it to ‘rain gold’. Waiting for the market to fall further and expose even greater opportunity.

As I sat listening, the fire crackling away, I began to fear that the Oracle of Omaha was expecting an even deeper bottom than the March 23^rd panic.

Then he made his key point. ‘Never bet against America.’ Explaining that the country had survived wars and the Great Depression. That an investment into America at its founding 231 years ago would have yielded a return of 5000 to 1.

He covered some of his old ground. It’s the business you must believe in. Don’t worry about the day-to-day share price. Which can be irrational. Buy as much as you can of a great business and hold it for as long as it’s great. Indeed, our philosophy here at Lifetime Wealth.

There were many questions from shareholders.

Most useful, we learnt that when Berkshire decides to sell a stock — it tends to sell the entire stake. They just did that with airline holdings.

We follow the same philosophy here. When we close a position — it is fully sold and closed. Because we’re either happy with the risk-to-gain reward ratio already achieved. Or we see the business case has changed for the foreseeable future.

But after some thought, the real reason Berkshire is hoarding cash is not due to a prediction on further falls of the market. It is because of the size of the fund.

They are looking to invest $30 to $50 billion in an acquisition. With buys of that size, you either acquire the entire business — or in stocks, you will move the market.

Just because the market drops on March 23^rd doesn’t necessarily mean big enough opportunities ‘rain gold’.

The corona recovery could be under threat

Buffett repeated that he did not know where the market would go next. That he didn’t know what the full consequences would be of shutting down the entire economy.

His warning of the long recovery period following the Great Depression was tipped against his more bullish convictions:

‘Never bet against America.’

‘Never waste a good crisis.’

Indeed, since panic drops around March 23^rd, the ‘Big Money’ — large funds which sway the market — have tipped toward betting on economic reopening.

See above. Once we get to the 80% red line, it suggests buyers are in control and markets overbought. Below the 25% green line, it’s just the opposite, when sellers are driving and markets are getting oversold.

Around the world, we’re starting to see the unleashing of pent-up demand. When malls reopened in South Korea, there were unprecedented queues.

But this week, the markets have started to fall again.

A new risk event has emerged…and we already know how it goes

American public sentiment toward China has fallen to its worst level ever. ‘Holding China to account’ is now an election issue.

We don’t yet know the full evidence on the origins of coronavirus. Time will tell.

Members of the US administration are alleging the Chinese government concealed the outbreak. And even that it may have resulted from an accidental escape at the Wuhan Institute of Virology.

Australia, the UK, and the EU are requesting an investigation into the pandemic’s origin.

Blame seldom solves problems. And it is the people of China who should ultimately judge their leadership. Though they may have little ability to do so.

What the markets fear now is that the US/China trade deal is now getting frustrated by coronavirus. And the Americans may increase tariffs. As a penalty.

Probably the bigger reason is the unemployment numbers now streaming across the US.

Tariffs work to reduce imports and encourage more production at home. America is going to need to protect and regenerate even more jobs post-lockdown.

But for the markets, a re-escalation of the trade war applies a blowtorch to the risk environment. Many listed companies have exposure to the Chinese market. For exports. For the import of components.

China is not only a large and hitherto fast-growing consumer market. It is integrated in the world’s supply chains.

This secondary risk event is now getting priced in.

My own view is that this risk event too has an end. There may be some more back and forward on the trade deal. But if China follows through on commitments to buy a whole lot more from America — you know what they say about looking a gift horse in the mouth.

Politics and economics do not always sail in the same direction. Political events can spur market fear. But a seasoned investor keeps their eye on the economic impacts facing their investment targets.

Risk events generate fear. Fear in the short-run creates buying opportunities for the long.

There are several updates on our portfolio holdings this week and revised guidance:

Portfolio update

General Motors [NYSE:GM], a Berkshire Hathaway holding, faces increased risk in the event of any trade war escalation. As we noted last week, efforts have been made to strengthen the balance sheet. The share price suggests rare value. But with potential escalation of the trade war, we’re increasing the business risk to ‘High’ and sharpening our ‘Buy-Up-To’.

AVJennings [ASX:AVJ], is another pick we’re increasing the risk profile on. Housing markets in Australia and New Zealand are now showing signs of stress with falling prices and volumes. It is the sharp downturn in sales volumes that puts such homebuilders most at risk.

While AVJennings does operate at the more affordable end of the market, it also carries debt-to-equity at around 47%. And margins are thin at about 6.7%. Uptick in this investment may now depend on gradual recovery of housing market volumes.

Westpac Bank [ASX:WBC] announced results as bad as expected on May 4. The interim dividend got deferred and profit was down 71%.

As with any big bank, it is a barometer of the wider economy.

Westpac noted that Australia faces a sharp economic contraction. With falling business and consumer confidence. And falling house prices.

Yet, Westpac also managed to increase its net interest margin (NIM) to 2.13%, up by 0.01%. And keep targeted common equity tier 1 (CET1) capital ratio at 10.8%.

On balance, results seem not as bad as the market may have been expecting. And despite trade war threats this week, the bank’s share price has increased.

Beyond the clear macroeconomic risks facing Australia this year, Westpac could still sit at rare value.

AGL Energy [ASX:AGL] provided a business update on May 5. You can view details here. The business appears well positioned to ride out this crisis, which was our reasoning to begin coverage last week.

While AGL reaffirmed its broad guidance range for FY2020, it also indicated it is unlikely to reach the upper end of that due to coronavirus impacts.

AGL is the largest and lowest cost generator in the National Energy Market and the largest investor in renewable energy on the ASX.

Charter Hall Social Infrastructure REIT [ASX:CQE] surprised the market with the announcement of a capital raise.

• It successfully completed a fully underwritten institutional placement announced on 4 May 2020 (‘Placement’), raising A$100 million through the issue of approximately 45.5 million new units (‘New Units’) at an issue price of $2.20 per unit.
• CQE is now undertaking a non-underwritten Unit Purchase Plan (UPP) to raise up to A$15 million. Under the UPP, eligible unitholders in Australia and New Zealand will be invited to apply for up to a maximum of A$30,000 in new units at the lower of $2.20 or a 2% discount on market price leading up to the offer close.
• New units issued under the UPP will rank equally with existing CQE units and will be entitled to the dividend for the three months ending 30 June 2020.
• Further information on the UPP will be lodged with the ASX and sent to eligible unitholders on or around Monday 11 May 2020.

In our view, this is an excellent opportunity to top-up on CQE. A business well-supported by childcare property assets. We will be doing so for the model portfolio.

Yet investors should also remain cognisant of the risks.

The need for a capital raise at such a low share price indicates the stress coronavirus lockdowns have placed on this sector and this business. Property valuations over the medium-term could well be much lower than current book value factors.

Though the UPP price of $2.20 does seem to offer some margin of safety.

We will be aligning our guidance at this price until after the UPP.

Sanofi [EPA:SAN] paid a dividend of EUR 3.15 per share today (May 6) to shareholders on record as of May 4. We note this is the 9^th straight year Sanofi has managed to increase its dividend.

Source: Sanofi. Dividends 2010-2020

Here is our updated market guidance:

 Current as of 5 May 2020 at 10pm GMT.

After watching most of the Berkshire AGM the other night, one of Warren’s remarks keeps ringing in my mind.

‘Never bet against America.’

We are now acutely aware of a new and powerful adversary. China.

But China is not a country where the world’s most talented people queue up to migrate to. It has risen on the back of a massive population and low-cost manufacturing. This is proving less sustainable than the rhetoric promises.

Don’t get me wrong. China has done well. And rescued millions from poverty.

Yet it also has an ageing population. Rising debt. Alongside growing suspicion and hostility from trading partners.

While massive GDP gives you political and military clout, it is the more intrinsic measure of GDP per capita that suggests sustainable wealth and productivity.

China has potential. But, on balance, the US remains the epicentre of opportunity. Because it is free and open.

Over the next few weeks, we’ll be keeping close watch on some important currency pairs for many of our subscribers:

• NZD.USD
• AUD.USD

New Zealand and Australia have lower levels of fiscal debt compared to the US. In time, this may work through to stronger currencies (against the USD). As they have more firing room to kick-start their economies.

And that could pave the way to look into some more turbocharged opportunities on the NYSE or NASDAQ.

So we too can bet on America.

PS: Have you had a chance to join our Wealth Talk podcast? As a Lifetime Wealth subscriber you can ask priority questions and have them answered during our next talk show on Friday.