Melbourne wealth firm calls out likelihood of depression

15 April 2020

A Melbourne wealth management firm which says it acted early to get client money out of risk assets in the face of COVID-19 is now expressing concern that the market and business conditions are ripe for a global depression.

The firm, Nucleus Wealth, said it predicted the COVID-19 crash prompting it to move client assets and now its head of investment, Damien Klassen says the company is deeply pessimistic about the outlook for markets and the global economy with no plans to rush back into equities or risk assets.

“The COVID-19 situation is severe, deep and disarming, but the overlay of other factors on top of the pandemic is why we are adopting a wait-and-see attitude,” he said. “Elements of that pessimistic overlay include the fact that corporate debt is at record highs. When corporate debt peaks there is almost always a recession. And central banks have just about run out of conventional monetary policy.”

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“Many companies run ‘just-in-time’ inventory and have very little slack in the supply chain. Now there is a supply shock for companies from shutdowns and quarantines, as well as a demand shock from closures and quarantine,” he said.

“There has been a massive hit to consumer confidence – it was poor before COVID-19 and has now fallen off a cliff – as well as business investment from this uncertainty.”

“We expect the de-globalisation of supply chains and trade will have echoes of the reduced trade during The Great Depression,” Klassen said. “All of these factors lead to dramatically higher unemployment rates. Unemployment does not bounce back quickly – hiring takes months, especially at larger companies. The rise in unemployment by 10 million people in the US in a matter of weeks is unprecedented. “

“Our forecasts mean we don't expect The Great Depression 2.0 to be as prolonged as the original, but current indications are that unemployment will be similar, possibly worse.”

Klassen remained wary of lifting tough social restrictions too early.

“Singapore and Japan are going back to extreme measures, despite early success, because this virus is so pernicious and the fact that people without symptoms carry it and pass it on with ease, without either side of the ‘virus transaction’ being aware of what’s happening,” he said.

“Until there is a vaccine, or at least an anti-viral agent where people who have the virus can be treated, we are in dangerous territory.

“The implications for managing our clients’ money is that we will continue to be defensive, accumulating quality stocks at opportune times. Our focus will be on preserving clients’ capital within the parameters our clients signed on to which is only investing in blue-chip liquid assets.”

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