Investment Idea

Is it a sustained V recovery we see?

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Mikael Syding
19/05/2020 | 5 min read

China's industrial production increased in April, compared with April last year. Does that mean the Covid-19 crisis is already over? Does everything thus return to normal, with one difference - that there is more money in circulation that has to find a home in different financial assets?

China's industrial production increased in April, compared with April last year. Does that mean the Covid-19 crisis is already over? Does everything thus return to normal, with one difference - that there is more money in circulation that has to find a home in different financial assets?

Of course, this is not impossible, given the huge stimulus packages being implemented. On the other hand, it is highly unlikely that hundreds of millions of disrupted economic relationships will find each other in exactly the same way as before.

Expect permanent changes

When tens of millions of people in the United States are losing their jobs alone, countless small businesses are falling apart and billions of people around the world are being forced to test new ways to socialize and work, some changes inevitably become permanent. Many entrepreneurs do not want or cannot restart. Many employees continue to work from home after the crisis, while many inevitably become rationalized forever when companies are given an alibi to terminate them and partly to see which ones were not actually needed. Everyone gets to challenge their habits and preferences, and just as the bombings of London's subway brought enormous permanent changes to the day commuters' route choices, the exercise of our eternal track learns.

There was already a pent-up need for a downturn

The conditions before the pandemic were, among other things, an already weak world trade and a prolonged trade war in the shadow of China's emergence as an economic superpower alongside the US. At the same time, a secular megatrend with digitalisation and automation has become increasingly dominant since the late 1990s. This is now further accelerated as a direct response to precautions such as social distancing.

China IP

Covid-19 was a severe blow to an aging economic boom, where history's highest debt mountains and stock market valuations nevertheless risked starting a cyclical decline shortly with purging of low-yielding companies and misdirected debt. The immediate social cost of a debt deflation in its current state is unthinkable for a sitting politician. Even before the crisis, 15-20% of US listed companies had difficulty servicing their debts. The consequences of not keeping these zombies alive are unclear. When 88% of the 500 most important stock exchange companies in the US had presented their Q1 reports, profits were 64% lower than last year, so the crisis will have real effects. It is therefore hardly surprising that politicians decide on zero interest rates and allow the digital banknotes to squeeze billions of dollars in order to keep the wheels spinning that can be kept going.

New monopoly money cannot cure either virus or uncertainty

However, the money can hardly stop the de-globalization process that had already been started by Trump and Xi. First, companies and countries are forced to change their logistics chains in order to get around temporary international transport obstacles, but also in the longer term the focus is on secure supply chains, ie larger local elements. As if that were not enough, no one today knows when or even if a functioning vaccine can be produced, if the virus will mutate, or even the total extent of tissue damage Covid-19 can cause. Uncertainty means that many of today's emergency precautions may very well become permanent. It does not necessarily mean that the world will be worse after the crisis, the ingenuity of humanity is better than that, but the world will surely be different. During a boom, production and consumption are becoming more and more perfectly adapted to one another, but an external shock or forced adjustment due to high debts in relation to income, ultimately robs the vulnerable balance sheet. This time the shock became unusually large. Before a new relatively stable equilibrium is reached, volatility increases while the trend is weaker than before. The situation can be aggravated by factors such as high debt and inflation, which both hamper the flow of information in the economy and can force unwanted economic decisions such as forced sales.

Keep maximum investment readiness in a maximum uncertain environment

Oaktree's Howard Marks recently described the state of the economy and financial markets as one of the most uncertain ever. The equally legendary Stan Druckenmiller called the prospects for the stock market the worst he has seen. Can central banks really and willingly force the stock market further, given the risk of long-term catastrophic consequences of manipulating the price of money? Don't count on it, but don't count on it either. On the other hand, expect uncertainty and volatility. And expect intensive ups and downs to succeed in tandem with spectacular action packages, bi-monthly macro-level statistics, and false starts in both the economy and the stock exchange. Expect to be charged at the stand if you do not have a plan of being more prepared than you have reliable forecasts.

Feel free to set up scenarios for various asset classes and industries, such as this graph of the Swedish stock exchange, the spread of the corona virus, the price of gold, silver and Bitcoin and the banks' credit losses. But don't use your scenario as a kind of fact, don't believe it. Use it to explore and evaluate old trends that are being broken and new ones being formed, and positioning opportunistically accordingly.

Covid scenario

So make no fixed forecasts, but keep an eye out for beginning new trends and be prepared for volatility. Keep your opportunities open; have more dry powder than usual, in the form of liquid and uncorrelated assets. It can be gold, cash or cryptocurrencies such as Bitcoin and Ether. The main thing is that you make sure that you have the opportunity to buy more of what is unmotivated cheaper, or can easily increase even in what more or less surprisingly becomes the winner after the crisis.

ommercial real estate in city centers can have long-term difficulties, as do some segments of the travel, entertainment and restaurant industries. Oil-related energy companies, as well as oil and other raw materials, can also be squeezed by sustainably lower economic activity than today. Although growth is gaining momentum, it is from a much lower level than a few months ago, and with poorer fit and efficiency than then.

On the other hand, concerns may make these assets so cheap that they become extra attractive. Now more than perhaps ever in modern history, it is important to have a broad and balanced portfolio, a portfolio that also has to a large extent high liquidity and an owner who is quick-footed when new trends are manifested. Try to be one step ahead of the market and consider eg. on how it will react when the Q2s are published in July. Are “everyone” prepared for bad numbers, so prepared that the stock market will respond positively. Or has this already happened in April and May, so the reaction is likely to be negative instead. And when? When will that reaction come? When does the stock exchange take into account what the Q2s look like? In just a week, two-thirds of the quarter is already over. It may be enough to have a decent track of Q2. Have you read about the industry trends beforehand and got ready? Everyone else has.

@Mikael Syding

This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capital protected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.


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