In light of recent events, our Investment Team have devised a Coronavirus Investment Strategy.
Our Coronavirus Investment Strategy as of March 25th, 2020:
Since the 10th March, the systematic shutdown of travel in countries across Europe and the USA, alongside multiple country borders, cannot be easily reversed. Countries succeeding in suppressing the Coronavirus have no exit strategy. The WHO suggests a strategy to identify through testing and restrict movement of people suspected of having Coronavirus, but this is not feasible with current testing in many countries.
Isolated suppression policies are, in effect, a “whack-a-mole” scenario where eradicating the virus in one area or country will be replaced by it rising in another area.
Therefore, finding a scientific solution in order to speedily identify who is contagious is essential, as against untargeted nationalistic border closures. Until this is the case, and targeted quarantine is possible, borders are unlikely to be re-opened or at a minimum partially re-opened.
With the borders closed, any business associated with cross-border travel will remain at risk, as will business that relies on the smooth transit of materials and people cross-border. Within countries that have been placed into lockdown to suppress the Coronavirus, there have been a range of responses to these issue from governments. To date, the UK, US and German government’s actions have been the most comprehensive, with their responses targeting private business and individuals.
However, most countries in mainland Europe have not, as yet, provided sufficient state support for private business, and some are providing none. Therefore, perfectly viable private businesses in many countries, especially businesses with high borrowings, will either default on debt, increase debt or run out of money if a lockdown continues for any time. For many, the initial impact estimates range between 4 weeks to 12 weeks, and this will be critical for future analysis.
However, these estimates are based on the concept of returning to normal. Unless the coronavirus is found to be suppressed through weather variations or there is, as previously written, a quick easy way of identifying and isolating people with coronavirus, then normality is unlikely to return in 2020. In a worst-case scenario, we can expect countries who have previously contained the virus will have to repeat the process including periods of lockdown in areas.
In this scenario, debt laden private businesses in certain segments, the obvious being to do with travel and leisure, are unlikely to survive through to the end of 2020. There are other businesses that will be in similar positions that have nothing to do with leisure or travel, of course. For example, property and associated business is likely to be badly affected for some time. New developments, buying and renting out of properties both for failed business, as well as individual everyday living, will be affected; companies such as Airbnb, reality /estate agents, developers and landlords should all anticipate severe downturns.
This will not be limited to a single country, and we would anticipate that the areas affected will be across sectors in multiple countries.
However, there can be winners financially; food and related producers, suppliers and distributors for example, will benefit in the short term. Software companies and IT service will also benefit from the wholesale shift of working in offices to home working. Whilst some of this will be short term, it is unlikely to immediately reduce in the longer term. Whilst home working will not be the panacea for all workers, it will have new devotees.
Markets and Countries
Within our planning, we consider that the current stock market volatility is unlikely to rebate in the shorter term. There will be large positive and negative swings in markets as new, previously unthought of consequences and outcomes emerge. We anticipate waves of concerns rising within different sectors and countries as the full impact feeds through. We are only in the first wave.
Whereas the immediate concern is our health, the length of suppression or ability to cope with published mortality rates, we believe that the focus will switch soon onto companies’ and countries’ ability to finance themselves. Hence, our concern is the impact on business and country fiscal positions. Starting with Italy, a country that was already weak economically, there are now some forecasts of a drop in GDP this year of -11%, which, if anywhere near accurate, would be devastating.
Whereas normally, the more powerful Eurozone countries would be expected to provide support, the limitation is that countries with large manufacturing bases will likely be badly impacted by the closed borders. Germany for example, is forecast to have a GDP reduction of up to -8% this year. For more background on the state of Italian and German manufacturing prior to the most recent coronavirus impact, read an interesting article here.
Many countries were affected in the last financial crisis in 2008, but only a very few came under severe pressure such as Greece, Cyprus, Iceland, Ireland and Portugal. It is likely that many more countries are going to be badly affected this time and, unlike last time, there has been a far more nationalistic approach initially, with little cross border assistance or co-operation.
This will put a strain on banks, and also currencies. Whereas banks in the UK and the USA either failed or had to be part-nationalised in 2008, it is likely that weaker European banks will be under greater pressure this time as they have not sufficiently recapitalised. If, for example, an Italian bank were to fail in the coming 6 months, there could easily be a domino effect leading to it being a problem for the German and French banks. In this instance, the Euro could find itself under pressure.
There is no saying this is going to happen, but we are thinking our Coronavirus Investment Strategy should look at the possible outcomes in these circumstances, along with long-term implications. We are concerned by events in the US, the approach being taken and the idea that this is a short-term blip.
Therefore, we have moved to an even more cautious position to allow for the more potential serious implications listed above. We think it unwise to come out of markets as we should remain exposed to any potential upside from the recent market declines. We have reoriented our coronavirus investment strategy to areas over the next 6-12 months that are most likely to benefit from the current shutdown situation, and to avoid sectors or countries that are likely to remain high risk. We will remain flexible and are prepared to change our position as more information becomes available.
We would caution that simply because a market index goes up by 10% in a day (as it did on the 24th March) that this indicates a bottoming or start of a market bounce. Whilst we cannot for sure say it is or is not, the reality is that markets are reacting on a day to day basis to the latest speech or action. The recovery is long term and will be determined by decisions yet to be made.
Background to the Coronavirus investment strategy being followed and the basis behind our thinking
At the last group investment meeting in January, the Coronavirus concerns were not being significantly reported or taken seriously in Europe or the USA. However, the investment team committed to remaining invested in gold and other cautious assets in case there was a general market correction. Since then, the coronavirus has impacted us, and our investment team has been holding emergency meetings.
Our team of experts will continue to monitor the situation, with our aim of providing market-beating performance. Our commitment to you, will, as always, be our focus.
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
This article was republished on 26th March 2020
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