[vc_row][vc_column][vc_column_text]The fiscal package announcement last night has gotten everyone excited and brought some cheer to the market. But I feel market participants will still have to be very cautious. While the majority in the market are beginning to discount that the Covid19 crisis will be over by mid-year – a point which I agree with – there are two things which I think markets have continued to underestimate (and thus haven’t discounted).
1. The solvency impact on companies.
With companies virtually seeing almost non-existent revenue due to the numerous local and cross border shutdowns, while still having to sustain costs – there will undoubtedly be massive financial pressures on many companies, both listed and private. Even looking at what had happened last night regarding Malaysia’s move to close its borders for 2 weeks, I’m wondering how do you model such an impact on growth expectations? And that’s just Malaysia.
What we will likely see in the weeks ahead as this continues is unfortunately a wave of cost cutting measures including retrenchment and insolvencies. And I don’t think anyone can put a finger on the percentage of insolvency we will see but it’s not far-fetched to expect “a lot”. The fact is many companies, especially the lower credit rated ones, have for many years depended on the flow of liquidity to stay afloat, i.e. as long as variable costs were met, business could carry on. Now that the tide has gone out, we will know who is swimming naked as Warren Buffet famously said once.
2. The new norm for the next 12 months.
While there has been news about how a vaccine may be introduced soon, but, the absolute truth is we are only likely to get one at the earliest in early 2021. Even that is the best-case scenario. What this means is that for at least the rest of 2020, we will have to live and adapt to Covid19. The measures taken now to lock-down countries and confine citizens to their homes cannot be realistically sustained. Sooner or later, life resumes. But life before a vaccine is found means having to adapt to one totally different from the one we knew prior to Dec 31, 2019.
And how that impact companies and thus markets remain unknown in my view.
Will people still travel? Yes. But maybe there will be an empty seat between passengers, who knows?
Will gatherings of more than X numbers of participants be banned until a vaccine is found? Potentially yes.
So, it will take some form of imagination to figure out the winners and losers in this new social and economic norm.
Given these and other factors, I would hesitate to say all these fiscal measures will result in a bottom in markets just yet. There are still ways to make money and opportunities, e.g. we believe gold is a strong candidate to do well in a risk-adverse environment; some private equity funds tied to the healthcare sector.
Life goes on and so does investing. We just have to get use to the new norm when doing so.[/vc_column_text][/vc_column][/vc_row]