The price of BetaShares Australian Equities Strong Bear Hedge Fund [ASX:BBOZ] units has dropped significantly from its March high.
But with cases of COVID-19 ticking upwards in some places, could we see a resurgence in the BBOZ share price?
Shares in BBOZ hit their high this year of $18.99 at the end of March, marking an ~87% rise in the month alone.
Since hitting its peak, BBOZ has shed ~55% as fear waned and worries of economic catastrophe were subdued by some better-than-expected economic results — at least somewhat.
BBOZ (blue) and XJO (red), source: Tradingview
But have we breathed a sigh of relief too soon?
First, second and third order impacts
BBOZ is a bear fund.
That means it profits from a declining market.
Essentially, the fund is comprised of cash and futures positions which take short positions in the market to profit from a fall.
A 1% fall in the Australian stock market on a given day can generally be expected to deliver a 2–2.75% increase in the value of the Fund (and vice versa).
So if it is doing well, the market is doing bad.
Investors will buy funds like BBOZ to protect themselves from bear markets.
And that’s exactly what we saw back in March — the first order impact on the market.
With cases on the rise in the Americas, Hong Kong and even Victoria, we could see the market slump again.
Currently, the proportion of the working age population ‘underutilised’ is around 25%
Compare that to estimates of peak unemployment rate during the Great Depression of 19.9%.
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That’s why it is important to consider the flow-on effects of an initial market crash — second order impacts.
How are people behaving differently? What are they buying? What aren’t they buying?
This morning we were given a sample of what these flow-on effects might look like.
Transurban Group [ASX:TCL] said that the 57% falls in traffic in April have improved and was only 21% than a year-on-year during the last week.
A far cry from the 70–80% traffic falls in parts of Europe.
Stockland Corp Ltd [ASX:SGP] said it was expecting a 6% fall in its commercial properties’ value, with its retail properties likely to be down 10%.
Is BBOZ a buy?
With reporting season not until August, the importance of the companies that have already released results is that they act as an economic barometer.
The economy is still highly constrained, but the market has managed to make decent progress regardless.
Meaning there will likely be both positive and negative flow-on effects to follow.
Jobs are still weak, and Scott Morrison has made it clear Australians will not be allowed to live off JobKeeper and JobSeeker payments forever.
It seems we could be stuck in limbo for the moment, just having to wait and see.
But depending on how governments are willing to act on spikes in new COVID-19 cases could be the tipping point for market recovery — and the BBOZ price.
That goes for stocks too.
There are five ASX-listed firms in particular, that have been beaten down during the crisis with the potential to rally strongly if the market recovers. Click here to learn more.
For The Rum Rebellion