Recent developments
While stage 2 of the financial stimulus proposed by the Government (and passed by the Parliament), and the prospect of more to come, is welcome – the harder line message about social distancing is of concern for the economy and markets.

Until Sunday night, the Government’s “flatten the curve” policy to manage the spread of Covid-19 looked more like the “mitigation” approach outlined in the paper released by the Imperial College in London (CLICK HERE to access the paper) on 16 March. Mitigation strategies focus on slowing but not necessarily stopping the virus spread – reducing peak healthcare demand while protecting those most at risk of severe disease from infection. The paper suggests such an approach may be needed for around 3 months to be effective.  However, our Prime Minister’s reference to increased social distancing lasting as much as 6 months is more in line with the “suppression” approach outlined by Imperial College which aims to reverse the spread of the virus by reducing case numbers to low levels and maintaining that situation indefinitely. In the Imperial College’s view, this approach needs to be in place for around 5 months to be effective.

Overall, it looks like Australia will be facing a longer period of impaired economic activity than previously expected. The Government appears to have decided to tighten the containment steps sooner rather than later and extend them through our usual winter flu season. More short-term pain, to head off a potentially bigger longer-term problem.

In view of all this, we expect financial market volatility to continue as the extended window of uncertainty about the impact of the virus offsets the positive news of stimulus and support. All things considered, we expect equity markets will see further meaningful drawdowns in the coming days.

Portfolio changes
As a result, we plan to make further reductions to domestic and international equities and also reduce AREITs exposure across the Proactive Portfolios SMAs. The proceeds of these changes will be allocated to cash across all portfolios. This will help protect capital as well as provide liquidity.

We will be moving a proportion of the international equity allocation into hedged assets. With the AUD currently trading below US$0.59, this is well below where bond differentials imply the currency fair value is, we believe now is the right time to make this move. In order to achieve this, we are reducing allocations to a few of the unhedged positions and introducing a hedged index exposure. When the global impacts of Covid-19 become clearer and markets start to normalise, we expect to see bond differentials unwinding.

For the listed security SMAs, two of the hybrid exposures have recently rolled off. We will allocate this capital to a fixed income manager that has a lower correlation to both the equity and fixed income market. This will provide flexibility and speed should we see the need to increase exposure when appropriate opportunities arise.

Further detail will be sent through in due course.

The Madison Model Portfolios will be reviewed in line with the above. Any changes will be communicated accordingly.

Kind regards,

The Madison Investment and Insurance Committee
1300 789 575