The Bear Market that Changes the World

With unprecedented falls in markets and responses for central banks FNArena Editor's Rudi Filapek-Vandyck looks at how this Bear Market is changing the world as we speak.

This Bear Market is a multi-layered problem. Market movements are demanding governments respond. Industries are literally coming to a stand still. boarders are closed and capital markets have shut their doors to areas of the economy.

Consumer, corporate and government responses are being redefined to the point that the world is changing right in front of our eyes. Filapek-Vandyck explores the companies that are at the most risk and those poised for the rally, when it eventually comes.

[00:00:00] The market has been punished and we've seen rapidly moving numbers in a market meltdown that we've quickly entered. What we've learned so far, they're the questions that we're looking at. We've really Filipic Vendome, editor of Effin Arena. Good morning. RUDIE How are you? [00:00:13][13.1]

[00:00:14] Yeah, I think we we should leave the good out of the morning greeting in this circumstance. I think let's just say it's morning and that's that's an objective assessment. [00:00:23][9.0]

[00:00:24] This is an objective investment as well. And that's probably accurate for the last few weeks. Now the markets have been torn apart and you've been an advocate for growth versus value for many years. Now you've written your own portfolio in portfolios that investors have access to. What have we learned so far in this market meltdown? [00:00:43][19.0]

[00:00:45] Well, I guess lesson number one is it's a very difficult to keep a cool head when everyone else is losing desks. It's I mean, this this is one of these times when we can we can use terms like unprecedented and historic events, seminal moments. And it's not hyperbole. I mean, it's actually quite accurate. In recent days and weeks, I've I've been reflecting back on in 2007 and 2008, I was describing to investors that we were we were witnessing truly historic moments and that books would be written and academics would spend all of time researching it. And in the decade ahead. And that's exactly what has happened. I mean, today everyone refers to the GFC and we all know exactly what that stands for. What happened that back then, to my surprise and to my astonishment and maybe a little bit too, to my concern and fear, is that I never I was always hoping that we would never would beat death experience. As I'm certain everyone who went through the GFC from an investment or an investor perspective would would would agree with me. But I'm actually coming to the conclusion that we are we are going to exit the GFC here. The GFC was basically the warm up to what we are experiencing right now, I believe. It doesn't mean that we will now have a sharemarket that is going to be moribund for the next 14 to 16 months and then end up 54 57 percent below current levels because these are stories that develop in terms of what comes next. And so far we have had two major shocks to the system. One is, of course, to the core of I was covered 19 pandemic. That is spreading around the world and that is causing a a massive dislocation in supply chains and in demand now for substantial parts of the global economy. And of course, if if everyone goes into lockdown, which is which is what's happening now, it's literally bringing industries to a standstill. And I don't think any one of us ever in our lifetime has experienced anything like this. And if you ever see movies of the 1930s, this will come as close as we as we saw in those movies. The difference, hopefully, is that central bankers and governments worldwide will will put in a much better effort this time around than they did back then. I won't a story on Monday and they call it this is the bear market that changes the world. And I'm truly convinced that this is actually what is happening here. If you go back to the core of what is happening is basically we build a house of cards on on leverage and on debt. And once that goes to fundamentals under that are being being smashed to smithereens, then we are truly in trouble. The only way we are going to be able to solve this is by throwing more money at it. And that, of course, is the irony. But that's we should all be mindful of that is exactly what's going to happen now. We are entering, I think, an era of essentially unlimited money. The Federal Reserve is effectively gone on limited. This week that has really little bit of a delay, hopefully stabilize the markets. But governments are coming to the bog and they will have to. I mean, we can all we can all criticize central bankers for what they've done over the past decade. And I mean, they probably deserve that criticism. But we should never forget that politicians have done nothing. They've left everything to central bankers. And it will be very easy for them to blame the central banks. But we should all realize that they have been completely absent. And if deaf, dumb, deaf, not offered any form of help to central bankers to clean up the mess that was left after the GFC. But this time there will have to be. And that's what financial markets essentially were demanding from politicians. Of all the wound's basically saying you have to jump into action because we will we will continue selling by double digits today. Good news, US politicians are coming to the body. The Malaysian government is about to announce a second round of stimulus and probably will still not be enough. But see, in my observation, in my assessment, I think central bankers will now go all in and they will have to because it's the only way that's left now. And politicians will. Governments will have to go all in as well. This is not a time to think about the budget surpluses and being cautious and all of that in very simple terms. And we we are we are going to see some references to the to the GFC of 2008. Industries are tripping over as we speak. I think the most logical one to trip over into us would be Boeing. And Boeing is too large, too big to fail. So somehow they will keep Boeing alive. Too many people would lose their jobs, et cetera. Other countries will start looking at an impact on the US, by the way, as well. We'll start looking at how can we save the airline industry. But ultimately, the longer the stakes will be, it will be too much. I mean, you can't become simply not safe. Everything that's to trip over from here. So for investors. One couple of things to keep in mind. No, the share market will not keep on falling every day. But B, we will. We will see rallies and downdrafts again. And picking the bottom will be much easier in hindsight than foresight. But some industries might might best be not exist in two years time and not not in the current form anyway. And now it becomes really, really, really of essential importance that you did you did you own stocks in companies of which you are certain that they will be around in 18 months time. [00:08:20][455.2]

[00:08:21] Your report has this great summary of looking at those companies. And then when hit with a crisis, it magnitude. The list is you don't want to own shares, company balance sheet, not enough cash, too much debt that needs to be paid off or refinanced soon. So we have to look at that in that lens and look at the ASX. What are your thoughts on the Australian market through that lens of exposure? [00:08:48][27.4]

[00:08:51] Well, the obvious ones are some of the companies that were that were popular up until last year. And I'm talking now about smaller biotechs and about technology companies into mid-cap space. Many of those don't have a viable cash flow going. If they have if there somehow needs refinancing or need to find money somewhere to cover the costs, they are in trouble. This is a time when Fletcher mark is actually close and you see that, for example, that already know. [00:09:34][43.8]

[00:09:36] Yeah, you see that from our contacts in the Australia raising money for these companies. They really had deals lined up, ready to go. March, April, May, hitting the markets to raise capital for these companies. Some tech companies, some biotech and some mining with high burn rates. And it will benefit bankers. If you said no, miss. You know, in writing, we're not going to get. [00:09:59][22.6]

[00:09:59] But it's actually not actually not happening exactly, so so any company now that on the foreseeable arise and needs to refinance debt or needs to raise capital is in deep doo da here. And those shares will ultimately end up with cents. I think if not just go out of business as an investor, you really, really want to pay attention now to two balance sheets and two debt positions and to to cash flow and financing. So that's. You cannot stress enough at this point. And luckily, I think analysts will know if the GFC is any guidance year. Analysts will now increasingly start going through their research and through their books and start identifying companies that potentially might end up in trouble. Macquarie has identified a few and it's always worth paying attention to be on a quick glance. Those share already have fallen quite, quite dramatically. Obviously there's a diary link there, but investors have to just Nebris format. Investors have to be now extra careful with companies like Old Media, Southern Cross Media or even the likes of Unibilt. Or don't call Westfield's Link-Up Ministration lendlease, Incitec Pivot, Quantas. To my surprise, there was also an an ale property group in there as well. And obviously one of the obvious ones is Dala GDI, which did some some questionable acquisitions and then try to sell parts of it. And also trying to get rid of its mining services division. But again, in this certain of these circumstances, that is absolutely not happening. So the share price has tanked. And that's I mean, that's that's how the market responds to to elevated risk. Essentially. It brings us back to that concept of quality versus versus value in a bear market. And you can have two approaches here. I mean, some of those well, probably most of the share prices in a bear market gets smashed too far to the downside. Not all of them, but many will. Well, we'll do exactly that. But that doesn't necessarily take away the operational risks. So what investors should do now is try to assess on what basis can can one expect that the situation can sort of normalize in whatever a reasonable amount of time for certain industries? And then you have actually a bargain at hand today. If all the premise you can stomach the extreme volatility that's not necessarily out the window just yet. Yell that the other stocks, of course, are my favorites that are stocks that that that will become that will basically be victorious after all this, the likes of likes of arrest met and CSL and others mean absolutely excellent companies with no problems on the balance sheet, a business that will continue growing even though there might now be some short term interruption, of course, in the index, quoth boss. But Dow by nowhere means comparable to mean. Airlines. Airports. Travel agents. Tourism operators. I mean, I had a quick look this week at Island Leisure and I had got a little bit of a shock. I didn't realize the share price actually had fallen that much. And that's obviously the market talking as well. That's the market basically saying that companies very unlikely going to survive in its current format. [00:14:13][254.0]

[00:14:15] You'll note made reference to the market's interpretation of questionable management abilities and control over the outfits and throw the curve ball of mass public gatherings and public events. [00:14:29][14.0]

[00:14:31] It might. To be honest, Mike and I tried to emphasize that a little bit as well, too, to investors. We have a we have a multi layered problem here. And while the central bankers are putting in all their might and really throwing everything at this what they can, their influence only goes so far. So now the governments have to come to the party and and they are reluctantly and there will. But also the governments at this point in time a little bit hamstrung because at the end of the day you can keep boring alive. But you can't force airlines to buy more planes from Boeing in particularly not since they have a problem with their 77 max. And that will ultimately be the problem. As as economies basically now are coming to a standstill, into a basket, to a halt. The worry I have and I am hoping that a little bit silly here and I'm too worried for my own good is that we we have still the early stages of the Opta pandemic hitting the United States and all the information that I can gather. The United States is absolutely not prepared in the same sense as the likes of Singapore or Hong Kong have been and are, which is likely to mean that there's still a lot of bad news ahead of us coming from the United States. And why is that so worrying is because this is the largest economy in the world. It's also the largest financial markets in the world. [00:16:20][109.7]

[00:16:22] And it sort of remains a little of an open question in how far Wall Street can can cope with the pandemic if it's hitting Americans just around the corner. And of course, I mean, I've studied politics in my younger years. The golden rule in politics was always populations to get the leaders they deserve. Unfortunately, we in the rest of the world, we never voted for this guy, but we will nevertheless get the consequences, unfortunately. Long story short, I would be if I was if I were managing my own money, I would definitely not stop looking to be a hero here. But capital protection would be full of mind. [00:17:13][51.4]

[00:17:15] You want to be careful here because people have been wiped out in the 2008 bear markets and they would never return again. That's a scenario you will not avoid. And we don't know yet enough. Also in the ARPDAU are positive signals coming from from countries like Singapore, Hong Kong, China as well. But we don't know yet whether there can be a second wave or follow up or mutation or you name it. We don't know exactly how bad this potentially can become in Australia, in large parts of Europe still, and in particular in the United States. So you don't want to be a hero here. But if you haven't sold yet, then maybe this is a bit late to sell as well. The market will try to find a bottom at some stage. Maybe we are in that process right now. At the very least, the comforting effect is today that this doctor in Sharmarke is trying to establish a BOULTBEE and not going in and experiencing another limit down day. Maybe the wisest words I have I've come across over the past few days is one of the analysts at what was stockbrokers exclaiming that at current levels a lot, but literally a lot of the share share prices look great value on a 12 to 18 month horizon. But you want to make sure that those companies are still around in 12 to 18 months. And that really is. And hopefully in the current format, that really is the essential now off of being invested in the sharemarket. [00:19:09][113.8]

[00:19:11] And that is a critical point in this market, that the uncertainty gripping the markets and bringing it back to the start. Well, throughout that conversation, we've said these points to assist. This is the bear market that is currently changing the world and it is really changing how these markets operate and how we work. Industry is coming to a standstill. Thank you very much for the insights. Really? Philip back then died from editor of Event Arena. Thank you. [00:19:11][0.0]

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