Investors buckle up for further volatility

Volatility on sharemarkets will ramp up in the coming weeks as the coronavirus crisis deepens, industry experts say.

Volatility on sharemarkets will ramp up in the coming weeks as the coronavirus crisis deepens, industry experts say, warning the local market may have further to fall despite a 30 per cent-plus plunge from the February peak.

Volatility could rise when companies start to report the earnings impact of the virus, Paradice Investment Management director Matt Riordan told The Australian.

“I think there’s a lot more volatility to come; I don’t think that (sharemarket) increase that we saw last week is suddenly a sign of the end of (the volatility). The reality is, the biggest single up days always happen in bear markets,” Mr Riordan said.

“The next step, unfortunately, is the sticker shock when you actually start to see the real earnings impact. It’s one thing to pull back on guidance but it’s another thing to say what the final impact will be. Markets don’t like uncertainty and so we think (volatility) will come back.”

The local market is expected to start the week in positive territory after dropping more than 5 per cent late on Friday.

ASX futures are pointing to a modest 6 point gain on Monday morning, with AMP Capital chief economist Shane Oliver saying this reflects the fact that the local market fell harder on Friday than its peers in the US and Europe.

Wall Street snapped a three-day winning streak on Friday, dropping more than 3 per cent, despite the US House of Representatives approving a $US2 trillion ($3.2 trillion) package aimed at addressing the coronavirus crisis.

The Dow Jones Industrial Average ended the session at 21,636.78, down 4.06 per cent, while the S&P 500 fell 3.37 per cent to 2541.47 and the tech-heavy Nasdaq Composite lost 3.8 per cent to 7502.38.

An announcement by the US Federal Reserve that it would slow the pace of its bond-buying program drove negative sentiment in the market, Dr Oliver said.

The US central bank on Friday said it would reduce its daily bond buying to $US60bn next Thursday and Friday, down from its existing purchases of $US75bn per day.

Profit-taking also played a part in Friday’s decline, CommSec chief economist Craig James said.

Despite Friday’s rout, all three US indices finished the week with solid gains as lawmakers moved closer to a deal on the stimulus package, which was signed into law by US President Donald Trump on Saturday.

Before Friday’s fall, the Dow surged 18 per cent for the week, and on Tuesday posted its best daily gain since 1933.

In Europe, Germany’s DAX tumbled 3.68 on Friday, France’s CAC 40 ended the session down 4.23 per cent and the FTSE 100 in London fell 5.25 per cent after British Prime Minister Boris Johnson and Health Minister Matt Hancock both tested positive for the COVID-19 virus.

The S&P/ASX 200, meanwhile, ended Friday’s session down 5.3 per cent at 4842.40.

The local market would effectively be playing catch-up on Monday, Mr James said.

“US markets did a whole lot better than our market over the past week. So, if anything, we have the potential to perhaps see a little bit more strength in our market at the start of trade.”

Economic indicators such as the purchasing managers indexes would be closely watched in the coming week to determine the early impact on the manufacturing and service sectors, he added.

China PMI data in particular will be in focus after it tumbled to 35.7 points in February, the lowest on record.

“We’ll also be watching for more company announcements about whether they’re going to continue to go ahead with issuing dividends or whether they suspend payments,” Mr James said.

“We’ve seen a significant incidence of companies wanting to hold back on cash and suspend dividends and/or guidance on their operations.”

Despite the local market plunging by more than a third in a matter of weeks, investors would have to get used to more volatility, Dr Oliver warned.

“Even if markets might be getting close to the bottom, we’re still going to have a lot of volatility. But it’s probably no longer a one-way street now.”

For investors braving the sharemarket, balance sheet strength should be a key priority when looking for buying opportunities, said Mr Riordan, who is co-head of Paradice’s Australian mid-cap fund.

“Every company we talk to, that’s the first financial question they get. So we are cautious about companies that have excessive gearing. We’re worried that the biggest issue with this whole thing is the dramatic impact it’s going to have on the economy in the short term.

“The real question is, how long does it last for and what does it look like coming out the other side. The longer it goes on, potentially the harder it will be to come out of it.”

Mr Riordan said he was seeking exposure to companies with resilient business models.

“Some of the telcos are obviously in that boat, some of the healthcare stocks are doing pretty well.

“We do see opportunities emerging but it’s just really difficult.”