Frank Jasper of Fisher Funds says the COVID-19 pandemic has shown investors need to be prepared to put money into businesses to bolster their robustness

Frank Jasper of Fisher Funds says the COVID-19 pandemic has shown investors need to be prepared to put money into businesses to bolster their robustness

By Gareth Vaughan

COVID-19 is impacting almost all aspects of life to some degree, which means it's having a massive impact on investing and investment decisions.

So how does an investor make sense of what's happening in this COVID-19 ravaged world now, and what's going to happen next month or next year? And why have share markets been rising when there remains so much uncertainty out there? In search of some answers I talked to Frank Jasper, chief investment officer at Fisher Funds. 

"We've been looking at the market through this four step lens to try to at least navigate our way through what has been going on," Jasper says.

"The first phase of that was coronavirus becoming a global problem rather than originally a Chinese problem. That's when markets really started to sell off in February. It was an incredibly rapid sell off. It was the fastest 10%, 20% and 30% fall in US shares ever."

"We were at that time looking for what might lead to some stability in markets and there were three things that we were highlighting. The first of those was the monetary policy response from monetary authorities around the world, and we've seen that in an incredibly significant way. So essentially quantitative easing forever in almost every country around the world, interest rates at their lowest levels of all time, a significant response from central banks," Jasper says.

"At the same time governments, or fiscal authorities, have stepped up to the plate as well, really cushioning economic activity through things like unemployment benefits, business support packages, and other tax driven incentives to different players in the market. So those two things have helped stabilise markets."

"And then the last thing was what was going on with the virus itself. So were we seeing the flattening of the curve, were we seeing evidence the social distancing put in place was actually going to work?"

"And ultimately progress on all three of those has led to this dramatic rally in shares, around about a 30% rally in shares from their lows in March," Jasper says.

He sees two phases to still play out.

"The next one, and the one I think we're in right now, I call it the reality phase. It is where we stop thinking about the monetary and fiscal and virus progression and we start thinking about how does the world change from here? Which of those changes are short-term, which of those changes are with us for a long time, and we adjust asset prices to reflect those changes," says Jasper.

Then ultimately we emerge from the clutches of COVID-19.

"The one bad bet in this is to bet against human ingenuity. We're a pretty smart lot when we decide to actually get focused on something. So there will be a vaccine developed at some stage, there will be good quality anti-virals, the globe will recover. That last phase is that recovery phase, what does that look like?"

"It won't look like the same world when we recover as the world we had in February before we went into this," Jasper says.

In terms of individual companies, Jasper says companies whose business models were already struggling are now having to face the music.

"What we are seeing is those business models that were already pressured going into this, this has become the straw that broke the camel's back. So companies with too much debt, companies where their core customer franchise has been unravelling, either because of disruption or because they just don't meet what customer needs are right now, or deliver genuine value to their customers. All of those sorts of companies face existential risk right now. And frankly they faced existential risk before this, but it was probably a pretty slow burn. This is the thing that will tip them over."

"This may be more hope than reality, but I would hope that businesses fund themselves with more equity and less debt in the future. Debt increases vulnerability. We're seeing that right now. I hope that we all learn a bit of a lesson from that. But I thought that in 2008 and I'm not sure we did," adds Jasper.

And what of bonds and fixed interest in a world of very low and negative interest rates?

"When I started my career you just never would've thought of a world where negative interest rates are just a reality in many countries around the world ...it is quite mind blowing. The implications of this are very wide and very wide ranging," says Jasper. 

"There's the implications for managing a bond portfolio and for us that has meant an increasing pivot away from government bonds towards corporate bonds. Until the coronavirus crisis those corporate bonds were very expensive, but we've seen credit spreads widen significantly over the course of the crisis. So that has been an opportunity to increase our exposure to that part of the market, an opportunity that we've taken with both hands."

"But I think the implications of low interest rates are far more wide ranging than that. If you think about how we've built portfolios in the funds management industry, for years and years and years there has been this real reliance that we have some equities, we have some bonds," Jasper says.

The two of them have complemented each other.

"So there's very much this inbuilt hedge from having fixed income and equities in your portfolio."

"[But] at these very low rates, unless bonds got to significantly negative rates, they're unable now to cushion the fall of equity markets if there was another fall. So the whole way that we build portfolios is actually called into question by the level of [interest] rates right now. [These are] quite significant changes in how the money management industry works and how all of us out there build our portfolios," says Jasper.

And what of property?

Fisher Funds owns office, industrial and retail properties on behalf of clients. 

"We've just gone through a revaluation round of those properties at the end of March. And I guess the trends, and they aren't surprising, we've seen valuations in retail come under pressure. Obviously retail assets are an area of problem right now, and we would expect rents for the next little while to be essentially zero, and for there to be a bit more pressure on rents going forward. Office valuations have been stable to down a little reflecting some of those issues," says Jasper.

"On the industrial side demand is very strong. If you think about the move to online shopping and online commerce, the demand for distribution assets, for industrial assets, is probably up. So again [there are] winners and losers as a result of this."

And what are the lessons from a COVID-19 world for investors?

"It does remind us all that being genuinely prepared for different situations, and building businesses that are robust is just such a critical thing. That as shareholders we need to have a voice that says 'make sure there's enough equity in the business, what are the risk management plans around potential crises, how do you manage your supply chain?' I think the world has become a real optimiser by optimising everything and squeezing the absolute last dollar of profit out of everything, [and] you actually lose a lot of robustness in the process," Jasper says.

"So I would hope one of the lessons we take is there is a trade off there between optimising every last dollar of profit and robustness of businesses. And I think the needle needs to swing a little bit towards that robustness. So that's a lesson I hope all of our businesses learn. And as investors we need to be prepared to put the money in to let businesses actually build those robust frameworks." 


*This is the seventh interview in a series looking at reactions to and potential policy responses to the coronavirus pandemic and evolving economic downturn. 

The first interview, with staunch critic of the economic mainstream Steve Keen, is here. 
The second interview, with director at economic advisory firm Landfall Strategy Group David Skilling, is here. 
The third interview, with Motu and Victoria University's Arthur Grimes, is here. 
The fourth interview, 
with Patrick Watson, senor economic analyst at Mauldin Economics, is here.
The fifth interview, with Climate Change Commission Chairman Rod Carr, is here.
The sixth interview, with Director of the Centre for Sustainability at the University of Otago Janet Stephenson, is here.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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20 Comments

WTO forecasts are not promising, just further divergence from previous levels of global business engagement.

"there will be a vaccine developed at some stage"
Big call.
I believe the Common Cold is a coronavirus, and we've been looking for a cure/vaccine for a century and still haven't found it.
https://www.bloomberg.com/news/articles/2020-04-28/virus-is-here-to-stay...

These people are going to be in trouble. Future-relevant skills? Nil.

The need to boost the game is somewhat apparent; one wonders what they really think.

With all respect, nobody has 'been looking' for a vaccine to the common cold with any great interest, as there has never been any financial incentive to do so. Additionally, the 'common cold' is not caused by any single virus; there are any number of coronaviruses and other types of virus, many as yet unidentified (because we don't test for it!), that cause what you refer to as the 'common cold'.

RE: corporate bonds. I was just looking at VECP vanguard EUR CBs, and they're only down 3% in 3 months, bouncing back from a 12% decline. 3% is nothing, that's a historical random monthly fluctuation! So the market thinks the risk of default is practically nil across an entire continent of corporations. What the heck. It's like the Wizard of Oz with markets now being driven by some weird little man hiding in a dark room.

Meanwhile in stocks;

https://www.zerohedge.com/markets/nomura-only-machines-are-buying-stocks...

Whenever I contemplate this, I can't get my head out of singing this song;

https://www.youtube.com/watch?v=hdcTmpvDO0I

Try getting this tune out of your head; "the Liar Tweets Tonight"
https://www.youtube.com/watch?v=TkU1ob_lHCw

No more share buy backs, no excessive executive pay/bonus, retention of profit, curtailing of dividend, no mad acquisition, no bad borrowing deals with investment banks, develop local business and use local resources and be honest in dealings with every one the business touches. These are the lessons for Corporates/Businesses. Have they learnt and internalised this ? Are Boards capable of changing ?
Time will tell.....

They are not capable. When they can't even budget a few thousand a year for rabbit control which is essential around here yet earn many millions to hundreds of millions the boards, CEOs and GMs should be sacked post haste.
I also will note here they are the only ones doing that. Work that out.

Exactly. And after a decade of aggressive "maximising of profits" what has global GDP been like? It's the weakest recovery on record, 1% less than the average. All the chicanery did was increase the vulnerability and systemic risks going into the next crisis.

Good insights.

Another interview with Matt Whineray would be very interesting also.

This lot dont know any more than you or I do.

They are essentially high value salespeople, attempting to keep their party going.

Returns need to be repriced, to reflect the risk. Money, and the way these banksters have been printing it, has lost alot of its creditability, and frankly I lost trust in a while back. The rot stated at Jekyll Island approximately one hundred years ago, when it was privatised to the Federal Reserve; who have essentially turned it into their own private tax system.

Money as a medium of exchange needs to be replaced with a universal exchange system; something that represents true value, that cant be corrupted governments can not manipulate it to hide the sins of their mismanagement. I thought bitcoin looked promising, until the banksters started manipulating this in an attempt to put it out of business.

What I do know is the current system is bankrupt in every way, and we will see a change. Who allowed fractional reserve banking anyway?

Great post :)

Actually I'm inclined to say that many businesses could recapitalise themselves by cutting away the vanity projects and concentrating on their core profitable competencies. For example we're tired of every CEO needing their own pet tech project most of which are just black holes for cash because they are far outside the organisations competency or profit centres. When will the lessons of corporate excesses be learned? As investors must force frugality upon executives by refocusing them on returns from core business activities. The situation is completely out of hand.

I'll assume your talking about Fonterra.

Well it does make more sense to invest in businesses and tech more than just dumping your money in to property. Especially when the face of these industries is changing moving away from central areas such as cities and working more in a 'gig economy' mostly working from home so they're more spread out and don't have a need to work in city areas as much, this had now received a big movement boost from the pandemic. This also helps business to cut down on overheads and commercial rental costs and reduces debt which is why the gig economy is on the increase.

So if you want investment growth look to tech and real economies and move away from the FIRE economy.

CJ099. The trick for investors is to pick the pace at which the demand for bricks and mortar drops. On line retail seems to peak at around 23% of sales and working from home is an option for only a limited number of businesses. Futurists correctly foresee that reductions in production and consumption must occur but have a poor track record of predicting timing. The C19 lockdown hit to the economy will be profound but is unlikely to drive a sustained paradigm shift in investor focus which will remain largely short term.

You can ignore the tech world and real economies as much as you like but it won't get you very far as the FIRE economy burns before your very eyes. These new trends will be long lasting as part of the new normal even after the pandemic.

Question? Why does this article not mention or address GDP and the money that is created when goods and services are created? After all, that is what the *real* economy is and has always been since the dawn of time?

If *real* money is absent next month and the month after, and the month after that.... because jobs have been lost, businesses have failed and there is a surplus of goods that no one can buy (presumably leading to new price discovery), no ticket clipping occurring.... where is this missing money in the equation suggested in this zerohedge article?

Is any government in the world giving its people *more* money that they would have been earning on their own steam? Is any government more than replacing the expected loss in GDP? Or more than propping up the existing debt? i.e is all the printing actually adding more money to the system or is it simply trying to replace what has already been lost and what is expected to be lost, in the recession anticipated?

Surely, inflation will only happen if there is a surplus of money in the system, so the government printing would need to be in excess of what has has been and what is about to be lost?

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