One of the biggest questions facing equity investors today is when and how to deploy surplus cash that they may have available. This is a question we have studied extensively in recent weeks, and while we can offer no definitive answers, some tentative conclusions may help to inform this decision. With that in mind, we set out here a summary of key points coming out of our analysis of the COVID-19 pandemic to date, and some thoughts on what might lie ahead.
Firstly, the outlook in the near term, we think, is grim. Probably more so than markets yet appreciate, and we expect to see more bad news than good news in the coming weeks and months. However, we also see some glimpses of light a little further down the track, and some possible tailwinds to recovery.
Starting with the near term, by now nobody needs to be told that COVID-19 is a critical health emergency whose management has profound economic implications. Some of the drivers of this are worth reiterating:
This combination of features mean that if it is allowed to get out of hand, the human toll could compound in a terrifying way. As a result, governments have little choice but to pursue draconian measures aimed to limit growth – the so called “flattening of the curve.” These measures, of course, are highly disruptive for some sectors of the economy, and will likely result in a sudden surge in unemployment and business failures. Government stimulus and support initiatives will soften the blow, but will come at a steep, and currently unknown cost, and will inevitably address only part of the economic damage.
Not only will the control measures be onerous, it appears likely they could be with us for quite some time. Global resources are being thrown at the “silver bullet” of a vaccine, but expert opinion suggests that 12-18 months may be the best case timeframe. We might hope that urgency and application of resources will accelerate these efforts, but at the same time, widespread deployment of a novel drug that has not been exhaustively tested for safety is a science experiment that should not be taken lightly.
This means that we could be in crisis mode for some time, and sustained economic disruption is its own form of contagion. As businesses in one part of the economy fail, their problems are quickly spread to other businesses who previously regarded those businesses or their employees as customers or debtors.
We note that some store has been placed in the idea that warmer weather might slow the progress of the virus, leading to more rapid success in containing it. However, while many respiratory infections including the seasonal flu and some coronaviruses do show strong seasonal patterns, this is far from guaranteed in the case of COVID-19. Some viruses, including some of the more recent zoonotic viruses, do not show a seasonal pattern, and published research we have seen does not support the idea that climate has played a significant role in the spread of COVID-19. Out own analysis of case growth rates across different parts of the globe similarly gives us no comfort that seasonal effects are having much impact.
Another argument for a more positive outlook is the apparent success of containment efforts in places like South Korea, and particularly in China which is further along the path than any other nation. While we agree that there are some encouraging signs there, for several reasons it is not clear to us that we should take too much comfort from these observations. These include:
Drawing limited encouragement from the climate argument and the Chinese data, we anticipate that the coming weeks and months are likely to contain more bad news than good news. Possibly a lot more. Accordingly, even though equity markets have already fallen significantly and offer better value than they did, we are cautious about deploying the surplus cash we hold on behalf of clients.
Any forecast, of course, is highly uncertain, and a case can be made for some buying today in case the near term holds better news than we anticipate, but it appears to us to be too soon to move aggressively.
Looking beyond the near term, however, we do anticipate a recovery. On a 12-18 month timeframe, the successful development of a vaccine might be viewed as a back-stop, allowing a return to more normal conditions over a corresponding horizon. In addition, on a shorter timeframe we see some reasons for optimism that may not yet have drawn much attention. In particular, we see learning curve effects offering real potential to mitigate the social and economic damage during the remainder of 2020.
Currently, COVID-19 is an entirely new threat to our health and our economy and we start from a zero base in terms of our knowledge and experience in fighting it. As time passes, however, all aspects of our approach to dealing with it will improve. To give a few examples:
To appreciate how significant these learning effects may be, consider for example the current border restrictions in force and their devastating impact to airlines and travel companies. In a world where testing for COVID-19 is cheap, accurate and readily accessible, it could be feasible to lift travel bans, subject to a requirement that all travellers first test negative.
It is impossible to predict exactly what advances may be made in the months ahead or to what extent they might ease the health and economic burdens, but we can be confident in expecting that improvement will come. Once case numbers are manageable and we are confident they can be kept there, economic recovery can be given greater focus.
Accordingly, while we anticipate further bad news in the near term, we are optimistic about an improving outlook over a slightly longer timeframe. As events unfold, we will be watching closely to try to discern the signs of a turning tide and ensure that clients are not left behind when recovery does come.