Four months ago the investment community was oblivious to what 2020 held in store. Then the market shocks began piling up: GDP growth, a collapsing oil price, unemployment and sliding corporate earnings.
We adapted, rapidly. Today, we’ve moved to analysing various scenarios exhaustively, trying to determine how and when these dislocations will settle — if, indeed, they ever do.
It’s hard to know anything for sure in the rapidly shifting reality that Covid-19 has brought to us. Yet there is one shining exception: it’s virtually impossible to imagine a scenario that doesn’t include some form of lasting consequence due to this coronavirus.
My own sense is that we’ll experience permanent shifts in our approaches to health, hygiene, the multiplicative nature of viruses, global travel risks, remote working, home schooling and what we can truly live with and without.
As investors I expect we’re already assessing our portfolios, investments and decision-making through a newly fashioned lens.
This is because, while each crisis exhibits unique attributes, it provides us with critical lessons too.
For example, for the first time in modern history the global economy faces a synchronised and sudden shutdown. This has created a sharp, immediate and severe recession, as both the demand and the supply sides have been frozen.
While we expect the brunt of these effects to be borne in 2020, without a vaccine it’s hard to imagine a world where "normal" levels of business activity will resume any time soon. The implication is that while levels of trade and employment might recover from the most dire levels, they’re expected to remain constrained for a while yet.
Understandably, governments are also demonstrating the lessons they learnt from previous crises. For instance, tactics learnt during the 2008 financial crisis include the immediate harnessing of monetary policy tools to cut interest rates, the swift pace of implementing financial stimulus packages and the provision of extra liquidity to banks and the credit markets. These interventions all helped reduce the duration, if not the pace, of the recent market declines.
While these measures were ostensibly positive, there is one critical snag: using this quantum of financial ammunition this early leaves little in the tank for future rounds.
Combine that with the high levels of global debt even before this crisis, and it’s clear that we’re borrowing from the future.
Consider this: in response to the 2008 crisis, the US fiscal stimulus over several years amounted to less than $1-trillion. This time, in a matter of days in March, the US government passed a $2-trillion stimulus package. Less than a month later, it added more.
It leaves investors unsure about how to assess the most likely market outcome.
In times like these changed over these past few weeks, so too has this element of our financial values.
Investors will shift their focus to the ability of a company to withstand protracted challenges. In this world, the tolerance for poorly structured corporate debt, excessive leverage, poor disclosure and complacent, noncommunicative management teams will remain low.
At the same time, individual investors and larger institutional funds will need to do much introspection into their risk-management strategies — including planning for extreme tail risk events, which have a low probability of happening but are significant when they do.
Around the globe we may also see a new trend of inflation, as countries rediscover local sourcing for their supply chains.
Companies will need to change, too: those that relied on business models that prioritised top-line growth over sustainable cash flow will need to rethink their economics.
These are just some of the lessons affecting investment decisions already. We’ll surely see many more in the months ahead.
But before we jettison the rules in the Investing Handbook it’s worth remembering that almost every scholar has come across the four most costly words in investing: "This time it’s different."
First attributed to legendary investor Sir John Templeton, those words are a timeless reminder that no era, cycle or sentiment change is ultimately so good, or so calamitous, that it will conclusively cause such a permanent shift as to make the drivers of investment returns diametrically different from the past.
As disruptive as Covid-19 has been, the long-term intrinsic value of several businesses has not materially changed. And, crucially, the way that value is calculated certainly will not change either.
Nonetheless, 2020 has provided a bleak reminder that there will always be times where economies deteriorate and markets react accordingly.
We may not know where the next crisis is coming from — but we know it’s coming. And when it does, it will come with a new set of facts. Responsible investors will need to adapt, factoring changes to their assumptions and strategies into their capital allocation plan.
These are exactly the times when you should be leaning on time-tested investment fundamentals rather than allowing yourself to be thrown off course by current sentiment.
- Govender is founder of Perpetua Investment Managers
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