Update

How the Rich Are Buying this Opportunity

I’m walking the local golf course, speaking to an old friend on the phone. He’s looking to draw down millions from a facility to start buying assets. More about that in a second.

It’s bizarre. The golf course – lockdown-closed for players — is now busy with walkers. There seems to be more people on it than you see playing golf. For a Monday, anyway.

Source: Brett Phibbs / NZ Herald

My friend can hear the wind down the phone.

‘Where are you?’

I explain. Lockdown. Sometimes you need to get out of the home office. Walking up to the tee, I sure wish I had my driver in hand to smash a ball down that open green space.

After we catch up on life, he tells me a bit about his investment plans. And we discuss the cash stimulus that is helping his business and many others. Keeping money circulating.

In the US, millions of adults are about to receive a USD $1,200 stimulus payment. Financial advisers are already posting suggestions on what to do with it.

The world over, the lessons of acting too late during the GFC are being remembered. And the money supply is getting increased.

Which is perhaps why we saw the biggest bull bump in history last week, re-chasing sold-off stocks.

My savvy friend is acutely aware that when you give people free money, such cash risks becoming ‘trash’. You want to put that into some real assets before more people notice. Especially when the overly-leveraged and fearful are selling those assets at rock-bottom prices.

So he is preparing a war chest to shop property and shares on sale.

With shares, I suspect my friend might have just missed the bottom

In my home office, I have this chart on the desk:

Current as at 14 April 2020

You’ve seen most of it before, back on 17 March. Back then, I was looking for a GFC-trigger discount of 40% in these indexes to trigger buying in a larger way.

By my analysis, the bottom was around 23 March. Over around a month, the indexes are back up — S&P around +16%, FTSE +19%, ASX +8%, NZX +12%.

The ASX is the laggard and a focus on today’s ‘Buy Up To’ recommendations within our portfolio.

Had you followed our recommendations in March to get into this dip, you may have enjoyed some delicious returns.

But where are we going next?

I’m off the busy golf course now, walking past the sea.

‘There might be all this cash from governments,’ my friend says. ‘But there’s also the deep shock of what’s happened. A lot of people are out of jobs. We’ve had to cut the pay for all our staff, including the CEO. And a lot of businesses may not make it. Retail was already in trouble before this.’

I try to consider all the implications:

• Panic price falls in the order of 30%.
• Wealthy cash-rich investors circling markets for bargains; enough of them to restore prices 15% or more in the short-term.
• People losing their jobs.
• Landlords wanting out of properties that were already very marginal on yield.

And I see that old pendulum again rocking between panic-sellers and bargain-hunters. Crisis and opportunity. Fear and greed. Pain and reward.

This time, the rich may get stopped in their tracks. Governments watched the elite increase their share of assets last time. During the GFC. This time, there may be wealth taxes. CGT again, anyone?

But that is very difficult to levy on globally diversified portfolios.

Then there’s the question of dividends. Pertinent in our income-rich portfolio. Banks, in particular, are being pretty much ordered to cut back on dividend payments during this time.

But in cash-rich parts of the world like Japan and for our REIT stocks, dividends may be expected to resume in full once life returns to normal.

When will life and the markets return to normal?

This not the Great Depression, which lasted more than a decade. As Ben Bernanke, former Fed chairman and scholar of that dangerous period in history remarked:

‘This is like a natural disaster, and the response is more like an emergency relief than it is a typical stimulus or anti-recessionary response.’

So, we are amidst a risk event. And preparing a recovery from it. I agree with Bernanke. There’s been a storm. We’re getting slashed by it. But the clean-up is in sight. And money is being choppered in.

There’s also plenty of developments to look forward to. COVID-19 treatments and a vaccine. 5G. Self-drive. Investment in strategic manufacturing away from China. And even a retail and travel resurgence as a socially-starved populace reconnect with the world.

On this analysis, we are continuing to buy through the storm. And are updating our ‘Buy Up To’ guidance.

The main risk investors will face is a dent in earnings where announcements post larger than expected. Then there might be more drawdown.

Let’s look at specific developments within our portfolio.

Portfolio update

Crest Nicholson [LSE:CRST] announced on Thursday that three-fourths of their workforce is now furloughed under the government’s job retention scheme. CEO Peter Truscott said that the company is looking forward to resuming operations when it’s safe to do so.

Here, we see a clear case of the pendulum swinging back on the force of bargain-buyers and government stimulus. In less than two weeks, the stock price is up almost 40%.

Westpac [ASX:WBC] announced to the ASX it is expecting around $1.4bn in write-downs due to COVID-19 and the previous AUSTRAC misfortunes. It is also making ‘significant’ provisions for loan losses. Yet it still appears the bank will be in profit for the first half 2020 (1H20). A decision on dividends is to be made when the board finalises the accounts.

The share price has remained fairly flat, and we continue to see value for long-run investors. Though there is considerable risk around earnings through this crisis.

NewRiver REIT [LSE:NRR] — a rising star in our portfolio until the pandemic hit — is now sitting at raw value. The retail sector was hit very hard. The business suspended earnings guidance and dividends, and they updated the market on a retail strategy that amounts to preserving cash:

‘NewRiver’s retail portfolio is focused on occupiers in the food & grocery, health & beauty, discounter and essential services sub-sectors, with almost two-thirds of our retail assets anchored by a major food and grocery brand. As a result, 36% of our retail occupiers by gross income are currently still trading, following a UK Government order on 23 March 2020 that all non-essential retail premises must close.

‘As at close of business on 30 March 2020, NewRiver had received 60% of quarterly retail rents relating to the first quarter of the financial year ending 31 March 2021. This comprised quarterly rents due on 25 March 2020 for our assets in England, Wales, and most of our tenancies in Scotland, and, for the remainder, quarterly rents due on 28 February 2020. In total, these quarterly rents represented 77% of NewRiver’s retail rent due, with the remainder being monthly rents, for which the next collection date is 1 April 2020. The Company continues to work constructively with occupiers who have yet to pay, to either recover late payments or agree alternative payment solutions, including deferment and transition to monthly payments.’

There is upside for NewRiver post-lockdown, when the economy reopens. But also high risk around vacancy and the time needed to rebuild. Subscribers should note that we adjusted the business risk profile on this asset to ‘High’ back when the pandemic first enforced closures.

But we are not alone in seeing value. Analysts at HSBC indicated on Thursday potential upside of 50%, with a buy recommendation.

As always, take broker recommendations with a grain of salt. They have vested interest that you buy. Here at Wealth Morning, we do not and are completely independent.

Tassal Group [ASX:TGR] has seen a good rise in the price. Almost 30% since testing lows in late March. As we said then, this is a domestically focused food business (salmon and seafood). That sell-off was likely overdone. We then noted insider-buying. The share price could still present value to those willing to overlook the demand risk on premium foods.

General Motors [NYSE:GM] has followed the market upwards.

People keep asking me about Tesla [NASDAQ:TSLA], noting its rise of 27% over the past week.

GM rose around 30% over the same period. And it still presents value with a P/E of just 5 and a much wider breadth, covering petrol, diesel, electric, hydrogen, ridesharing (Lyft), and now ventilators.

You do start to wonder how far Tesla can keep going on negative financials. But the answer is as long as virtue-signalling is still in vogue. And people keep driving these Spock machines.

Here is our current portfolio with updated guidance:

 Current as of 14 April 2020 at 10pm GMT.

As I ended my neighbourhood walk the other day – across the golf course, past the beach, back through the streets — I did feel a renewing energy.

A couple at the dairy are buying scoop ice creams. Enjoying the sunshine in spite of the breeze. Searching for the old ‘normal’ patterns of consumption.

A Tesla drives silently by.

When the economy opens again, there’ll be much pent-up demand. From lattes to plasterboard. Coronavirus curves may flatten. The doors fly open. And money is ready to roll.

Markets have some real fuel for now. At least until we see the earnings damage.

PS: You should see our new Wealth Talk podcast available in your Lifetime Wealth Investor members’ site. Feel free to post any questions you may have. Our topic for this Friday is:

True Corona Storm Yet to Hit: Your Chance to Buy Shares or Property at Rock Bottom?

Look forward to discussing this!