The Share Market
The ASX200 Stock Market Index reached an all-time high of 7199 in February of 2020. Just over 4 weeks ago the ASX200 posted its biggest fall on record reaching 4546 (37% fall) with the overall market wiping off $165b in value. While the ASX has regained some of those losses over the past 2 weeks, volatility remains in overseas markets dealing with uncertainty on two front – the coronavirus and record low oil prices! The U.S. Dow Jones Industrial Average (DJIA) reached highs of 29,551 and fell to 18,591 on 24 March and has also recovered somewhat to now be trading around 23,500 at the time of writing this newsletter. This is significant, as the Australian share market in only 1.8% ($1.3t) by market capitalization compared to worlds markets ($71t) and therefore we tend to follow major markets like the U.S. ($26.1t) when it comes to sentiment.
What will the stock market look like in a post-coronavirus world?
There is no crystal ball when it comes to forecasting markets although some insight can be obtained from events over 100 years ago. During 1918-1919, the Spanish flu hit in three waves devastating the world with more than 50 million people losing their lives. Consequently, the second wave of the pandemic coincided with the thick of the post-WWI recession causing the DJIA to fall sharply for a three month period.
A recession hit the U.S. less than a year after the mortality rate for the Spanish flu hit zero, with unemployment topping 10% and deflation hitting 18%. The bear market took blue chips down 46% during that period.*Some facts & figures, as reported in MarketWatch
While we hope history doesn’t repeats itself, fund managers and professional investors alike are looking at alternatives in their search for alpha whilst also searching for diversification and defensiveness for inclusion in balanced portfolios.
Why use Alternatives you ask?
REMI Capital provides professional investors access to a range of alternative investment options. For example, investors can get access to a fixed term investment with a fixed rate, some pay quarterly distributions, whilst there are varying terms available (12 or 24 months) with capital returned on maturity. REMI Capital investments have a negative correlation to traditional asset classes which is a key concept in portfolio construction, as it enables the creation of diversified portfolios, like a balanced portfolio with a 10-20% allocation to alternative assets, that can better withstand portfolio volatility and smooth out returns.
So what are Alternatives?
Alternative assets generally comprise those investments which do not fit within traditional asset classes (shares, property, fixed interest and cash). Examples of alternative assets may include absolute return funds (e.g. hedge funds), unlisted private market assets, infrastructure, opportunistic ventures like start-up companies, etc. As with all asset classes they come attached with different inherent risks and liquidity considerations. Some alternative assets have more growth characteristics whilst others hold the place of defensive assets in portfolios.
Infrastructure and unlisted private market assets like unlisted property generally are more exposed to individual investment concentration risk as there is less diversification due to fewer investments being held in the portfolio. In addition, these assets are also exposed to interest rate, market, and inflation risk. Hedge Funds aim to eliminate many market-related risks through the use of derivatives, leading to derivative risk, and individual investment risk still remains (although this is reduced through the diversification of investments).
Alternative assets have a real place in client portfolios to support true diversification and smooth out returns. REMI Capital offers investors the opportunity to further diversify their portfolios with fixed terms (12 months or 24 months) with rates of return (8% – 16%) depending on investment selection.