Panel:
John Plender, Financial Times
Chris Mayer, Woodlock House Family Capital
Also in attendance:
Gustaf Nordbäck, CEO Headspring
Michael Skapinker, Financial Times
Per F. Lorange, Lorange Network
Question 1: Particularly attractive areas to invest, now with the Corona virus threat, in terms of sectors as well as geographical areas?
As a background we should keep in mind that we are faced with probably the worst recession in a long time. The stock markets are, however, in general, doing quite well. The equity market has substantially recovered, and we are thus witnessing a sort of disconnect. Central banks and governments are injecting significant amount of funds into the economy – hence the relatively strong stock market.
There is indeed deflation now, quite analogous to what we had in the 2008 economic crisis, and this deflation has been accentuated by the Corona virus situation. Over time, we shall however see a shift towards inflation. There is pent-up demand, and salaries are likely to rise (especially when it comes to low incomes employees as well as health care workers).
This shift from deflation to inflation shall only come about in the longer run – and it is indeed hard to be more exact regarding when this shift shall take place. But, so far, wages have been held down primarily due to excess labor in Asia, above all in China.
Demographic are changing. Also, why should health care workers go along with such low wages, given the high risk they taking? In short, the balance between capital and labor is changing, in the longer term.
Back to the shorter-term Corona virus threat realities: In general, larger, well-run, well-funded firms are doing well. But many smaller firms will not survive. They may simply not have sufficient liquidity reserves to sustain four months or more without any revenue income.
Discounted cash flow of a firm’s expected net profits stream is determining this firm’s stock value. And many of the larger firms do have relatively predictable net income streams, in contrast to cyclical stocks, such as automotive.
All said, it is likely, of course, that counterintuitive investment opportunities might be attractive, such as in travel, real estate, oil/scarce metals, infrastructure, etc., and even some that are intuitive like health and tech. And, to look for “safe” income streams is key!
Question 2: What sectors and geographic areas should be avoided? (also, more on what to do!)
As mentioned, cyclical companies should be avoided. And, perhaps retail too. There are new risks stemming from the Corona virus threat situation. Only businesses which can realistically operate during the pandemic seem ok. Also, look for companies which have good business models but are badly run – too high overheads! And, try to avoid firms that are too heavily leveraged.
With so many companies going out of business, the competition landscape for those surviving will, of course, then also change – for the better. With reduced competition, survivors can exploit new opportunities and directions. Those fewer restaurants that are surviving will be relatively more likely to thrive, for instance!
In general, there shall probably be new pandemics, and on a fairly regular basis. We have been having pandemic waves in the past too, although nothing of the scale of the present crisis!
Remember too that the market knows. So fish for hard-hit sectors and the not so obvious. Investors need to look at real assets - property, equity, infrastructure. For example, alternative housing such as student accommodations, new real estate developments in low population areas with lower health risks, new uses for the increased amount of plastics used. And good research will pay off.
Question 3: What is new when it comes to the environment, give the Corona virus issue?
The common “label” when it comes to this is “Environmental/Social/Governmental”, or ESG. And the trend towards focusing more on ESG seems to be accelerating. In line with this, there seems to be a growing interest in ESG funds.
But can firms now afford a full-fledged ESG agenda, given that their financial capacity might have become significantly weakened, as a consequence of the Corona virus pandemic?
When all is said and done, there seems to be a change towards a more balanced emphasis on stakeholders, in contrast to the more conventional focus on stakeholders primarily (too financial! Too short-term!). We may be seeing the emergence of a new breed of capitalism, perhaps with a more active role by the government sector too, but in terms of regulations, not government-owned firms! Hopefully, there will not be much room for populism!
This “new breed of capitalism” is likely to be focused on providing relatively much salary increase and support to those at “the bottom of the pyramid”. Inequality differentials are likely to becomes less. Long-term focus will weigh more than short-term. The governance part of ESG needs more improvement.
Many public companies do not have owners any more, rather institutions. Family owned businesses tend to outperform over a longer period of time, with skin in the game and controlling influence.
Question 4: Your strategic plan: how has it changed?
Basic principles of investing remain the same (pick value stocks, hold assets for a long time and reinvest wisely!). And to do careful research remains key. But there are indeed several fundamental changes. We have already discussed many of these. In addition:
The portfolio is likely to have to change relatively more than before, and with quicker reactions. “New attractiveness” must be capitalized on.
There will be new opportunities created. To stay alert is key!
Are we seeing some of the behavioral changes remaining after the end of this pandemic, just as we saw airport security procedures remain in effect after the 9/11 terrorist attacks? Are we going to see relatively more use of face masks in Europe and the US, quite similar to what we have seen for some time already in parts of Asia? And, shall there be less hand shaking, and less hugging? What about large public gatherings, with the breaking of the norms of social distancing, such as when it comes to sports events, concerts, theatres, movies, bars, …?
Shocks to the global economy, like the Corona virus, are rare, but they provide an opportunity to shift public opinion and expectations.
Question 5: What is coming up after this pandemic?
We shall probably see relatively more emphasis on technology. And, there shall probably be a willingness among many governments to simplify the tax system and tighten many loopholes and special interest considerations. And, in general, tax levels are likely to rise. We may have stagnation and a statist kind of world like in the 1970s.
The labor versus capital rebalancing issue
Labor is likely to become relatively more prominent, at the expense of capital, i.e. a rebalancing. The present unemployment issue is likely to delay this rebalancing, however.
The supply chains
Gillian Tett of Financial Times has done research which points out that firms with strong GST emphasis tend to perform better than other firms. This is largely due to a more deliberate focus on their supply chains. This involves paying one’s suppliers, rather than engaging in endless renegotiations, often relatively small.
For how long can the Central Banks’/Governmental bailouts continue?
We tend to see bigger and bigger bailouts. And, simultaneously there tends to be a reluctance by central banks to raise interest. The issuance of government boards has, until now, been a major vehicle for this. But for how long can this continue. There might become a time when large segments of the public will no longer be ready to purchase such low-yielding government boards. Then we shall see a sever break-down. What will happen next? Only time will tell.
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