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.