Treasurer Josh Frydenberg admitted the inevitable, on Wednesday.

Australia is in a recession.

Under the accepted definition of a ‘technical recession’, Australia would need two quarters of GDP contraction in a row.

(Don’t get me started on arbitrary labels. That’s a rant for another day.)

And Wednesday’s GDP numbers for January to March showed a decline of 0.3%.

In ordinary times, that’s the first shoe to drop, and we’d all wait to see what the April – June quarter brings, hoping madly to avoid having to use ‘the R word’.

But these aren’t ordinary times.

Everyone accepts that coronavirus restrictions will bite — hard — making the current quarter an absolute lock for economic contraction.

So sure are we all that even the most optimistic, clinging-to-the-faintest-hope politician needs to admit that we’re in recession.

It’s a foregone conclusion.

So the market crashed on the news, right?

Not so fast, Olly.

The ASX 200 was up 1.8% on Wednesday, the very day the news was announced.

Huh?

Not only that, but we’ve gained around 20% since the mid-March lows.

The economic news keeps getting worse. The ASX keeps getting better.

So much for the doom-and-gloomers, thus far at least.

Buy why? How?

Before we get to that, Flight Centre Travel Group Ltd (ASX: FLT) and Corporate Travel Management Ltd (ASX: CTD) (I own shares in the latter) were up 8% yesterday on nothing more than an announcement that Qantas was tripling its number of daily flights: from ‘bugger all’ to ‘not quite bugger all’.

No actual extra flights, yet. No extra bookings, yet. Just an announcement, of an intention, by one airline, while the other domestic airline remains mired in administration.

Huh?

Has the market lost its marbles, or is there some sanity prevailing here?

I think it’s the former. Here’s why:

I want to present you with a simplified version of the sort of algebra that wonky analysts do to value companies.

In the full, complicated (but really useful) version, they forecast growth, and allow for an expected return. They also recognise that if $1 in 5 years time is worth less than $1 today (because, why wait for the same return if you don’t have to?). That’s the ‘time value of money’.

So the summary below is woefully simplified for the purpose of valuing a company, but is useful to illustrate a point.

Let’s say you have $100, and I offer you 10% a year for 5 years.

Assuming I’m as good as my word, in 2025 you’ll have $150 (your $100 back, plus $10 per year).

Now, let’s say I came to you and said ‘Look, there’s this coronavirus thing. I can’t pay you this year. But it’ll be over soon enough. I’m pretty sure I can pay you next year, and we’re both convinced I’ll definitely be able to pay you in 2022’.

Your investment won’t deliver $150 any more.

The $10 payment in 2020 is gone. And 2021 is uncertain. Maybe a 50% chance.

Your $150 is reduced by $10 for 2020, and we’ll lop $5 off our expected 2021 payment.

Instead of getting $150, you reckon $135 is more likely.

Your money is now worth 10% less than it otherwise would have been worth ($135 divided by $150).

Apply that to the sharemarket (with the caveats I outlined above), and shares should fall by 10%. And maybe 15% once you factor in all of that ‘time value of money’ stuff.

So how much did the market fall between mid-February and mid-March? About 38%, give or take.

Seems kinda overdone in hindsight, doesn’t it?

And, given that, the rally over the past 6 – 8 weeks seems rather logical, rather than blind optimism.

And even more so, given the regular stimulus announcements made during that time, adding more cushioning for a struggling economy.

The ‘don’t panic’ message is one I’ve tried to hammer home in this space ever since the beginning of the pandemic. So far, it’s been the right approach.

I’m not a ‘victory lap’ kinda guy. And even if I was, it’s patently obvious the race isn’t over.

There are a multitude of things that could go wrong, for the economy and for markets, over the coming months. Frankly, the most likely cause of a market fall is probably investor sentiment, I reckon. Investors and traders run in packs.

Right now, they’re all believing in each others’ confidence. If that starts to wane, the pack can reverse course quickly. That’s how we ended up with the stock market’s pandemic overreaction (not to the health crisis, but to the economic impacts) in the first place!

About now, you might be thinking “Yeah, but the economy!”

It’s true, the economy is suffering right now. But ‘the economy’ isn’t really a thing, other than a conglomeration of the people that make up business owners, employees, parents, kids, retirees and everyone else. 

So it’s important to remember that it’s not the economy that suffers, but people.

And, as WSJ columnist Jason Zweig tweeted yesterday:

“It is deeply uncomfortable to watch Wall Street party while Main Street emerges from lockdown into tear gas, but the market isn’t taking a moral position.”

It is uncomfortable.

But don’t let that blind you, as an investor, to the way you need to think about markets.

Share prices are, at their core, ‘the sum total of all future cash flows, discounted for the ‘time value’ of when that cash is received’.

And, as with my super-simplified example above, even a dead stop in profits for one year doesn’t impact the underlying value of a company as much as you might think (or as much as the market assumed, in March).

Remember, too, that while shares are up 20% over a couple of months, they’re still around 17% down from the late February high point.

Context is a funny thing. “How on earth are shares up 20%?” and “Shares are down almost 20%” are both correct — but the starting points (and dates) are different.

I understand the feeling of not wanting to invest until ‘the coast is clear’.

But it’s important to remember that by that time, prices will likely be much higher.

The stock market is absolutely connected to the economy, but the timeframes are hugely different.

Wednesday’s GDP was a snapshot of a recent — yet past — three month period.

Share prices are an estimate of all — future — cashflows, from here to eternity.

It requires a very particular effort to partition those things, and treat them separately.

Many can’t. That’ll probably cost them a fortune.

We confuse those two things at our peril.

And I think you and I should keep investing, with our eyes not on yesterday or today, but on the long-term horizon.

Fool on!

More reading

• ASX 200 down 0.35%: UBS upgrades NAB and Westpac, Qantas soars again
• 3 of the best ASX 200 tech shares for your watchlist
• The Kogan share price is surging higher following another positive business update
• Is the Westpac share price too high?
• Is today’s BHP, NAB or Afterpay share price a good investment?

Motley Fool contributor Scott Phillips owns shares of Corporate Travel Management Limited. The Motley Fool Australia owns shares of and has recommended Corporate Travel Management Limited. The Motley Fool Australia has recommended Flight Centre Travel Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post We’re in recession. What does that mean for investors? appeared first on Motley Fool Australia.

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The Afterpay Ltd (ASX: APT) share price has risen by 12.19% from Monday to Thursday this week. This company has pioneered the buy now pay later (BNPL) sector in Australia. It currently has a market cap of ~$13 billion and has spawned a large number of clones trying to replicate its success. 

The BNPL companies entered a raging bull market after weeks of consecutive good news announcements and large gains. The market has realised ‘pay later’ is here to stay. Openpay Group Ltd (ASX: OPY) saw its share price rise by 160% from Monday to Thursday, followed by all BNPL companies on the ASX.

Where does the Afterpay share go now?

I believe a good growth-share should have a chance of returning 10 times the initial investment. From initial share price to today the Afterpay share price has risen by an amazing 1,669%. Yet, I don’t think it is still a good growth share. For it to rise another 10 times or 1,000%, it would need to have a market cap over $130 billion. I just don’t think it is going to happen.

CSL Limited (ASX: CSL) did it, but CSL also has a lot of unique products and intellectual property, creating a massive barrier to entry. Afterpay has no barrier to entry, an array of smaller competitors both local and international and faces the Australian market entry of Klarna, which is 5% owned by Commonwealth Bank of Australia (ASX: CBA).

While I don’t necessarily think the companies below are better than Afterpay, I do believe they are more likely to see large scale growth in their share price. 

Sezzle Inc (ASX: SZL)

Many commentators often compare Zip Co Ltd (ASX: Z1P) favourably with the Afterpay shares. However, I prefer Sezzle. Sezzle is ASX-listed but headquartered in the United States. As such, it is a native company in the prized market for BNPL companies. Sezzle is focussed squarely on the Gen Z and millennial markets. It reaches them via its merchants primarily.

The company increased its users and its merchants tenfold between 2018 and 2019. Today it has a network of 1.3 million users and 14.9 thousand merchants.

EML Payments Ltd (ASX: EML)

EML payments is a fintech company more diverse than the Afterpay share. Its core business is selling gift cards at supermarkets. This is a high-margin revenue stream which the company continues to grow via acquisition of Prepaid Financial Services in Ireland.

However, they are also one of the great enabling firms of the fintech sector. Its product, EML ControlPay is the payments engine behind many of the world’s surging BNPL companies. These include Zip Co, Italian BNPL company Scalapay, and Sezzle. If this continues they will be receiving benefits of the BNPL marketplace across many companies and many countries.

Foolish takeaway

I am very confident both of these companies can increase their market caps tenfold. In the case of EML, that would mean a market cap over $10 billion. In the case of Sezzle, a market cap over $2.5 billion. I would be happy to own either of these shares. 

More reading

• Why Appen, CSL, Openpay, & Zip Co shares are tumbling lower
• Is today’s BHP, NAB or Afterpay share price a good investment?
• Why today might be a good day to buy NAB and Westpac shares
• Could the Openpay share price signal a wider boom for BNPL?
• 3 small cap ASX tech shares that could be stars of the future

Daryl Mather owns shares of Sezzle Inc. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO and Emerchants Limited. The Motley Fool Australia has recommended Emerchants Limited and Sezzle Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post 2 ASX shares better than the Afterpay share appeared first on Motley Fool Australia.

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June means the financial year is drawing to a close and it’s a good opportunity to boost your super.

Let’s dive into some good reasons to think about topping up your retirement accounts this month.

Why you should try to grow your super in June

There’s a couple of arguments in favour of trying to grow your super. For one, you could be getting ‘free money’ from the Federal Government, depending on your income level.

The Aussie government will contribute up to $500 to your super fund when you boost your super by $1,000 on an after-tax basis.

To take advantage of this, you need to make sure you meet the eligibility requirements. This includes having a super balance under $1.6 million and a total income less than $38,564. You can also receive a progressively lower government contribution amount if your income is between $38,564 and $53,564.

This means you could potentially grow your super by a total of $1,500 in June. It’s hard to beat a 50% instant return on investment, even if you won’t reap the benefits until you reach the preservation age.

With the S&P/ASX 200 Index (ASX: XJO) falling lower in 2020, now could be a good time to get some superannuation units at a discount.

There’s also the potential to contribute on a before-tax basis. If you contribute before 30 June, you could lower your taxable income in FY20.

For instance, if you earned $50,000 during the year and have managed to save $13,000. You could potentially boost your super by $13,000, claim the tax deduction and make your taxable income $37,000 for the year.

That means your marginal tax rate would fall from 32.5 cents to just 19 cents. All of that while giving your retirement funds a big boost.

What’s the catch?

Of course, contributing additional funds to superannuation is not for everyone. There are always the potential regulatory risks (i.e. government changes) and the fact that your money is locked away for a long time.

However, if you’re looking for simple ways to reduce your tax this year, growing your super is a straight forward way to do it.

More reading

• We’re in recession. What does that mean for investors?
• 2 ASX shares better than the Afterpay share
• ASX 200 down 0.35%: UBS upgrades NAB and Westpac, Qantas soars again
• Talisman Mining share price jumps 12% as drilling set to begin at Lucknow
• Why Appen, CSL, Openpay, & Zip Co shares are tumbling lower

Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Should you aim to grow your super in June? appeared first on Motley Fool Australia.

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