As you know this year has been turned upside down by the COVID-19 pandemic. The global and local economy has been dealt a hammer blow with a force not seen before and we are unlikely to return to a pre-COVID environment anytime soon.

Global equity markets have performed a V-shaped recovery since the panic sell off in March which saw falls of some 30% and entry into a bear market followed by a reversal and new bull market with gains of some 20% or more. We are not convinced this exuberance in the absence of certainty and earnings will continue.

The V shaped recovery was based on optimism global economies would stage a rebound, but this has not occurred with various new spikes in infection rates. It could be said the share market recovery was staged by retail investors (hopefully buying quality at a lower price with a long term view) however institutional investors have sold off their positions for liquidity, rebalancing and opportunity.

If the economy loses traction at this point, the recovery will seem more a U shape and may lead to substantial downside in equity markets. Remember the risk free rate is akin to 0%. As the economy deals with contraction, leverage (more specifically excess debt) in our financial system will create substantial bouts of volatility.

So we are in a crisis of a different kind and with further to go. Investors must be aware of the risk of the widening gap between fundamentals (such as leverage and earnings) and central bank / government stimulus and ensure some margin of safety through this period. The fact that low rates are forcing investors, including retirees, up the risk curve at this time is a worry. So too is whether stimulus in all its forms can be continued leading to a wealth inequality and implications for our future generations.

In this uncertain volatile environment, have enough cash to get through another market shakeout or at least 12 months supply. Remain in quality assets such as equities and bonds but make sure they are liquid (accessible). Investments that are illiquid and managers that veer away from disclosures such as unlisted vehicles should be avoided. Leveraged investments like margin lending should also be avoided, but fortunately we do not see this much of this activity these days.

We have been made aware in a recent Fidelity survey, among other sobering statistics, is 55% of Australians have less than 3 months reserves set aside if they were made unemployed (this is a possibility for some, the real unemployment rate is ~14% if we strip out job keeper support), and 17% or people with no cash reserves. What is the personal and social cost here if a protracted recession occurs?

Some legislation has been introduced such as the ability to reduce minimum pension payments from superannuation and is appropriate if you are retired and unable to recontribute monies back into super.

There are others such as catch up concessional contributions for those looking to deploy excess cash and early super access for those unfortunate with less cash that has been very popular.

It is worthwhile looking at your borrowings / interest rate and check if you can get a better deal with your bank, or broker. Centrelink opportunities are also available.

Doing a budget (yes we know this can be tedious) or reducing unnecessary discretionary spending (that’s no fun) should be considered in light of impending risks. If the economy loses traction where will you be placed? Living within your means, capital preservation techniques and a quality focus are a cornerstone of our financial planning values.