The financial markets have, for some weeks now, been ‘healing’ from the Corona-crisis. The recorded lows of 23 March already lie some time behind us. However, the virus is currently in its most lethal phase. Let us review the situation on 3 battlefields:
1) The health war
This is the most important one. Not only from a human perspective, but also from an economic perspective. If private consumers and corporations do not feel safe, all the rest is irrelevant.
Slowly, but surely, we gain more insights into the workings of the virus and a few interesting observations can be made.
- It appears most deaths occur in the age group 70+, whereby the average age of death lies at 80.
- In a large majority of cases, it seems other pathologies are the true reasons causing death.
- It seems far more men than women succumb to the virus: two thirds of death are male vs. only one third female.
The observations made above make one wonder how we can make our society more robust. Nevertheless, these are problems for the future.
In the sanitary war, progress has been made on the following levels:
- Public awareness
- Scientific mysteries of the virus
- Hospital capacities
- Protective gears (e.g. masks and aprons)
Even though the news-flow is improving daily, more progress has been made on the following levels:
- Testing capacity
- Therapeutical solutions
- Contact tracing
Many people as well as companies are doing a tremendous amount of research. All with the ultimate goal of creating a vaccine. But it is unlikely it will be achieved before 2021. The World Health Organization (WHO) has indicated as many as 70 different molecules in various stages of testing. Professor Sarah Gilbert, the renowned vaccinologist from Oxford University, has even stated that a vaccine might be readily available as soon as…September.
2) The real economy (Main Street)
It could be argued that we were much closer to the abyss in 2008. But, today’s recession is much deeper. The Great Financial Crisis (GFC) resulted in a rather short recession, lasting only two quarters (Q4 2008/Q1 2009). For our economies to reach pre-Corona levels, it would require a tremendous economic recovery in the second half of this year.
This seems unlikely, however, as the economic setback for some sectors (e.g. tourism, entertainment, aviation, etc.) will last much longer. For instance, tourism represents 14% of Spanish GDP and 50% of Turkish GDP. Unless a vaccine is created much faster than expected, a full economic recovery will take far longer.
Of utter importance is the fact that governments around the globe try and keep businesses from defaulting whilst at the same time keeping individual purchasing power intact. Without going into too much detail, we can easily say that all interventions by central banks as well as governments, so far, have been very efficient. The speed, the size and the focus of these interventions have safeguarded our economic, sanitary and financial future. As far as we are concerned, this deserves a big thumbs up for policymakers. It could always be better, but, then again, nobody is perfect.
3) The financial markets (Wall Street)
Equity markets have shown a strong recovery thanks to the many interventions by central banks and governments. However this is mainly based on expectations since 90% of the relief packages still need to be activated. Probably many of these relief programs won’t even need to be activated. And those that will be activated will possibly generate handsome windfalls for the governments, just as they did in 2008. Just think of the huge profits European governments made after bailing out the crippled banks during the financial crisis in 2008. Even though the great merit of these interventions will be psychological, the benefits cannot be underestimated.
Over the past few weeks, our portfolios have shown a nice recovery from the lows. We remain focused on detailed analysis of all companies we are invested in. And for those clients invested in fixed income, government bonds of the highest quality. We focus our analysis on the following characteristics:
- Staying power: solidity of balance sheets and level of indebtedness
- Earnings power: capacity to generate positive cash flows
- Growth power: who will emerge stronger from this crisis
At some point, this virus and ensuing sanitary crisis will pass. Once it does, economic recovery will be strong. Many of the companies in which we are invested will emerge stronger. Whatever the outcome, it is clear that volatility is here to stay. For you as an investor, it is important to identify if you can relate to your chosen risk profile. Are you able to handle volatility and can you handle stress related to this pandemic? If not, talk to your relationship manager, as you are probably investing with too much risk.
