Damien Klassen

Nucleus Wealth, the Melbourne-based wealth and superannuation manager that predicted the ‘Covid-19 Crash’ and took all clients’ money out of risk assets before world markets fell dramatically in late February, says market and business conditions are ripe for a global depression.

Head of Investment Damien Klassen says Nucleus was on alert for any event that might end the current economic growth cycle – one of the longest on record – so when news of COVIS-19 broke we did an in-depth study of issues relating to the pandemic, creating a database of cases where the disease was contracted, not diagnosed.

“Based on this evidence, we got an insight into the rapid growth in cases caught outside of China because the number of cases exported from China fell (after travel bans), offsetting and hiding the rapid growth in home-grown cases. On this evidence we made the call to dramatically de-risk client portfolios.

“Today we remain 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.

“Elements of that pessimistic overlay include the fact that corporate debt is at record highs (see chart). When corporate debt peaks there is almost always a recession. And central banks have just about run out of conventional monetary policy.

“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 quarantines.

“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 (see 1929-1933 trade graphic).

“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 remains 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.

“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.”

Nucleus has more than $100 million in separately managed accounts for individuals, SMSFs, private companies and in regular SG superannuation accounts. In March, performance for the Nucleus Tactical funds ranged between +0.1% to -1.4% verses stock markets down more than 20% (see chart).

A suite of portfolio options is offered to superannuation and non-superannuation clients, with Nucleus placing a premium on risk control, investing only in blue-chip liquid assets (cash, government bonds, the top 80 ASX stocks and the top 1600 global stocks) in separately managed accounts. Clients can customise their portfolios to meet ethical, risk and income needs.

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