Monday 25 May 2020 How the economy will play into the hands of investors in bank shares If a quicker-than-expected recovery emerges, then you can rule out another big second leg down for stocks. Here’s why I think investing in banks now for a pay-off over the next decade looks like a good play. The Treasurer will ban the payment of stamping fees on listed investment companies (LICs) and listed investment trusts from July 1. Does this mean LICs are dead in the water? Paul Rickard recommends 3 LICs to buy and 2 to sell. Sincerely, Peter Switzer Inside this Issue 02 How the economy will play into the hands of investors in bank shares How the economy will Bank shares and the economy play into the hands of by Peter Switzer investors in bank 06 3 LICs to buy and 2 to sell Are LICs dead in the water? shares by Paul Rickard by Peter Switzer 09 10 stocks fighting COVID-19 02 10 of the most promising companies by James Dunn 12 Buy, Hold, Sell – What the Brokers Say 9 upgrades, 15 downgrades by Rudi Filapek-Vandyck Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before Switzer Super Report is published by Switzer Financial Group Pty Ltd AFSL No. 286 531 acting, consider the appropriateness of the information, having regard to the Level 4, 10 Spring Street, Sydney, NSW, 2000 individual's objectives, financial situation and needs and, if necessary, seek T: 1300 794 893 F: (02) 9222 1456 appropriate professional advice. How the economy will play into the hands of investors in bank shares by Peter Switzer As investors, we’re always trying to cope with disappointing compared to the US. We’ve comeback uncertainty. Most of you would’ve realised that I try 13.5%, while the Yanks have regained 32%! to stick to consistent rules of investing that reduce the chances of being smashed by the stock market over A big part of that rise is because the US market has the long run. It’s why I invest in quality companies, the FAANG stocks — Facebook, Apple, Amazon, especially when the stock market goes panicky on Netflix and Google (Alphabet) — which are huge me. companies in the US indexes. And most of their share prices are at 2020 highs! Meanwhile, banks are huge I’d love $1,000 for every time over the past 10 years in our indexes and we know they’ve been smashed I’ve recommended buying the dip on the stock by the Coronavirus closures and market. I make this call because it’s a part of my Government-powered rescue plan. consistent investment strategy. Now with so many companies unfairly smashed, if you have a When the economy recovers, so will bank share longer-term take on a business, it’s stock-picking prices and the local Index will start playing catchup on time. the S&P 500 in the States. In 2019, when so many great companies looked What’s my best guess on the economy? And fully-priced, I was investing in the Index via ETFs. because of the non-economic curve balls of the virus and its potential to bring a second wave of health and S&P/ASX 200 wealth problems connected to future economic closures and lockdowns, this is the toughest forecasting challenge of my life. Knowing my limitations, I’ve developed the competitive advantage of knowing which economist’s work is reliable, so I’ll use the consensus of their views, along with my own set of dependable indicators to do OK in guessing our future. That worked out pretty well until late February when In 29 years, I only used the R-word (and even then it the world was told the “China virus” (as Donald was tentative) during the GFC. Now I know I get Trump likes to call it) was declared a pandemic by accused of being a perma-bull but I’m sure we’re in WHO, which until then was playing down the threat. a recession now. Though there have been some How do I know that? Well, I was writing it and was economists who think statistically we could miss out curious why the stock market was not more rattled on a technical recession. than it was in early February. That would happen if the March quarter, which was There’s no use crying about spilt milk so it’s heading towards positive growth, was only just onwards and upwards. That’s been the case for the positive because the month of March wasn’t bad S&P/ASX 200 Index since the low for stocks on enough to take us negative for the quarter. March 23, though our bounce-back has been Thursday 28 May 2020 02 Of course, the June quarter will be a big, bad higher.” (Wikipedia) negative for growth but the JobKeeper policy, which was aimed at reducing the severity of the economic The chart below shows the slump and rebound in collapse, would’ve softened the drop. That said, it consumer confidence. Note how it was around 109 in still should be a shocker. mid-February, which was a three-month high, so being 92.3 points is heartening. My best guess is that Then we come to the September quarter made up of if the reopening of the economy works out, then the July, when most of us will be back at work, even if a weekly confidence reading will beat the 100 level, lot of us spend more time working at home. More where optimists outnumber pessimists. normalcy should be achieved in August and ditto for September. This could be a marginally positive month for growth. On this scenario we might only see negative growth in the June quarter and therefore no technical recession. But the June quarter is a recession in reality, even if it can’t pass the economist’s definition of one. Of course, this is the best-case scenario and we could actually see negative growth in the March, June and September quarters because we don’t rebound our spending when things progressively get back to normal. Confidence will be critical and what we do with it is even more important. I loved this heading from CommSec’s Craig James, who has been a good predictor of the economy over The one economic reading I’ve been watching and time: “Green shoots of recovery?” taking seriously, as a possible guide for the future, has been the ANZ/Roy Morgan weekly consumer But we need more positive numbers before we say confidence reading. This has to tell us something the worst is over for the economy and the stock about how the lockdown, the social restrictions and market. the virus updating is affecting our willingness to be as normal as we were before anyone uttered that damn Remember, if we get economy calls wrong (it would word — Coronavirus. likely be linked to a virus-problem), then we’ll see a second leg down for stocks. And this would mean On the latest reading (last week), the ANZ-Roy chaos for the economy and a short-sharp recession Morgan consumer confidence rating rose by 2.2% to that becomes a V-shaped recovery would be totally 92.3 points. That means that sentiment has lifted for ruled out. seven straight weeks and is up 41.4% since hitting record lows. On March 29, after the stock market hit We could end up with a 12-month recession, which its low, the index went to 65.3, which was the worst some economists call a depression. And the second reading since 1973, when Gough Whitlam was PM. leg down for stocks could be worse than the first! That has been the pattern for stock market crashes, What made us more scared in 1973? That was the with the second drop being the worst. year the oil crisis began in October “when the members of the Organization of Arab Petroleum OK, that’s the worst-case scenario. Right now, the Exporting Countries proclaimed an oil embargo. By stock market, which is a forward-predicting machine, the end of the embargo in March 1974, the price of oil believes second-wave problems will be small or had risen nearly 400%, from US$3 per barrel to manageable. It expects businesses and consumers nearly $12 globally; US prices were significantly Thursday 28 May 2020 03 will gradually return to normal, albeit with a slowness more credibility on the forecasts of the CBO than any in believing the worst is over. That’s why we haven’t other predictor. seen the market approach pre-COVID-19 levels, though you have to ask what the Americans are This meant that Knoxy had to delve into what the smoking? Have a look at the S&P 500 rebound CBO had to say. And the June quarter news is below. shocking, as the following shows: Economic growth down 12% in the June quarter. This would annualise to a huge 40%! Unemployment tops out at 14%. By year’s end, the US federal budget deficit will be US$3.7 trillion! By year’s end, US federal debt hits 101% of GDP! The key US Index is now down 14.5%, so the overall But it’s not all bad news. market is out of bear market territory. But it has still had a serious correction.