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MARKETS, ECONOMICS AND MORE: INSIGHT INTO THE POST COVID-19 WORLD
WEBINAR | GLENN SILVERMAN CFA CA(SA)
THE POST COVID WORLD: AGENDA
Backdrop
Megatrends and C-19
The post C-19 world: Global
The post C-19 world: SA
Conclusion
THE POST COVID WORLD: AGENDA
Backdrop
Megatrends and C-19
The post C-19 world: Global
The post C-19 world: SA
Conclusion
No one knows how this will pan out, though strong views (& false facts) abound…
Backdrop: Peering into my crystal ball - Words of caution
“The future isn’t what it used to be…”
Anon
“Prediction is very difficult, especially if it’s about the future…”
Niels Bohr
Advice: Plan for the worst and hope for the best...
Backdrop
The last such ‘seismic event’ was the GFC
This one is just bigger!
A discontinuous event: Best explained by Chaos theory?
Closest historical analogies to it might be:
Spanish flu (1918-1920) AND
The Great Depression (1929-1939)
This is a global reset ie. It will have a generational impact
New timeframes now apply ie. ‘BC' (before C-19); 'DC' (during C-19) & 'AC' (after C-19)
DC could be far longer than we think (hope)
Key to understand:
Past: The buildup phase
Present: Where we are now, & then:
Future: The likely implications…
Backdrop
6
EVENT START END DEATHS
Black Death 1331 1353 75,000,000
Great Plague of London 1665 1666 100,000
1st Asia Europe Cholera Pandemic 1816 1826 100,000
2nd Asia Europe Cholera Pandemic 1829 1851 100,000
Russia Cholera Pandemic 1852 1860 1,000,000
Global Flu Pandemic 1889 1890 1,000,000
6th Cholera Pandemic 1899 1923 800,000
Encephalitis Lethargica Pandemic 1915 1926 1,500,000
Spanish Flu 1918 1920 100,000,000
Asian Flu 1957 1958 2,000,000
Hong Kong Flu 1968 1969 1,000,000
H1N1 Pandemic 2009 2009 200,000
Large pandemics (> 100,000 deaths)
Global risks – likelihood vs. impact
Backdrop: WEF Global Risks 2020: Infectious disease - A known risk...
Source: WEF Global risks report, 2020
Warning signs have been lurking for some time…
Backdrop: So, how was the world placed when C-19 hit?
Global imbalances have persisted, and indeed got bigger, for a long time
Physical (Finite Earth)
Financial
Societal
Most are unsustainable
(Herbert) Stein's Law (1976):"If something cannot go on forever, it won’t…“
In theory ‘yes’; But in practice…??
And then came the so-called 'Black Swans'
Opec+ collapse
COVID-19
Neither were unknowns, Neither expected; But certainly not together!
Oil (WTI) price (1990 – 2020)
(70%)
(70%)
(60%)
Backdrop: Black swan #1 - Oil
Crude oil prices under pressure for some time: Shocks becoming ‘common’
US hotel occupancy rate
Daily global flights NYC subway fare swipes
Change in seated diners (YoY)
Source: BCA research
Backdrop: Black swan #2: C-19 Economic impact – Dire!
DOW Jones Index: Price (LHS) vs. % change YTD (RHS)
March 16th: DOW Jones posts biggest 1-day point loss in history; Then, a significant recovery….
Backdrop: Black swan #2: C-19 Market impact
-37%
+27%
Fed cuts rates to 0% (again)
Asian crisis / 'flu'
(1997)Dot.com bubble
Y2k/TMT
(2000)
GFC
US property/ sub-prime crisis
‘Too big to fail’
(2007/8)
C-19 (sovereign) crisis
‘Too big to bail’?!
(2020…)
$ Billions $100’s of Billions $ Trillions Tens of $Trillions!
+3 years +7 years +12 years
Backdrop: Financial markets: Monsters I, II, III & IV
LOSSES
1998: LTCM
'Crony' capitalism"Privatize gains; Socialize losses"
"If debt is the problem, then more debt unlikely to be the solution...“
Start of Moral Hazard
Backdrop: The ‘Central Bank put’ was firmly in place…
“...the ECB is ready to do whatever
it takes to preserve the euro. And
believe me, it will be enough...”
July 2012 - Mario Draghi
“...in previous recessions the Fed &
the government always acted
carefully, to avoid moral hazards or
political backlash. Today authorities
are under no moral, political or even
legal constraints to bail out the
economy and financial markets…”
April 2020 - Alpine Macro
Mario’s message was very clear & lead ‘inevitably’ to the current status
US corporate debt: Non-financial corporate securities debt* (% of GDP)
Not unexpectedly, corporate debt levels rose (doubled); Well spent?
Backdrop: Leading to even more excess: For eg. US Corporate debt
Note: *Based on a sum of GDP figures, and an average of debt figures, for the previous four quartersSource: Refinitiv, US Board of Governors of the Federal Reserve System, FT
Companies vs. Investors: Cumulative stock buybacks since 2008 ($bn)
Backdrop: Another eg. US share buybacks…
Corporations: The only net buyer of US stocks since the GFC…!
Source: breynold strategy / Canaccord Genuity
2048
1024
512
256
128
64
32
16
8
4202020091998198719761965195419431932
Historical valuation norm based on marketcap/GVA & margin-adjusted P/E (MAPE)
Durable S&P 500 level (not breached at any point in the future)
S&P 500 Index (log scale)
Valuation gap
Source: Hussman Strategic Advisors
Backdrop: And, US equities were / are expensive…
Top 5 companies as % of S&P 500 total market cap
Backdrop: With other extremes evident too
Source: BofA Global Investment Strategy. Bloomberg
Z-score (𝝈) of March 2020 asset returns*
Backdrop: March ‘20: All hell broke loose - ‘A Minsky moment’
Source: BCA research
US initial weekly jobless claims
Backdrop: US initial jobless claim – Mar '20
Source: U.S. Labour Department; Bloomberg
22m (14% of workforce) now unemployed (ex 'Gig' workers) ie. A decade of US job gains wiped out!
Great Depression:Peak: 25% (1933); > 14% '31 to '40
Great RecessionPeak: 10% in 10/09
RP: Pl update with latest #s
S&P 500 Index: Current vs. Aug ‘86 – ‘88
The closest similarity?
Backdrop: Market crashes: A comparison
Peak-to-trough market decline %
Source: Forces / Trefis.com
Market recovery time (months)Peak-to-trough decline (months)
1929 1987 2000 2008 2020 1929 1987 2000 2008 2020
Backdrop: Market crashes: A comparison
The Bear market over so soon!?
?
Source: Forces / Trefis.com
THE POST COVID WORLD: AGENDA
Backdrop
Megatrends and C-19
The post C-19 world: Global
The post C-19 world: SA
Conclusion
THE POST COVID WORLD: AGENDA
Backdrop
Megatrends and C-19
The post C-19 world: Global
The post C-19 world: SA
Conclusion
What is a Megatrend?
Large, transformative forces
That will:
Define our future world over next 10+ years
Have far-reaching, global impact
C-19: Will impact on all aspects of our lives
GLENN’S BIG FIVE:
Megatrends & C-19: Trends that will shape our future
Utilize this framework to assess the C-19 future world
FINITE EARTH DEMOGRAPHICS / SOCIETY FINANCIAL REPRESSIONTECHNOLOGYSHIFTS IN POWER
Number of recorded natural disasters
(1900 – 2019) Mankind encroaching ever more into nature
With huge damage already evident
Extreme weather: Increase in frequency & severity
Increased risk of ‘cascading’ disasters
US (1980-2018):
Natural disasters caused >$1,5tn in damage
The system is severely weakened
Growth at all costs: No longer viable
Significant LT implications: Monster V?
Megatrends & C-19: Finite Earth: The damage cannot be ignored
Source: EMDAT (2020): OFDA/CRED International Disaster Database, University Catholique de Louvain - Brussels
Days before and after Chinese New Year
100
80
60
40
20
0-30 -20 -10 0 10 20 30 40 50
Reduced emissions post C-19 due to:
Lockdowns
Reduced: Factory output; Manufacturing; Travel etc
Emissions fallen across the globe
China: 25% decreased in energy use & emissions
US: 50% YoY reduction in NYC carbon monoxide emissions
But business rearing / needs to get back to work
Unlikely to be sustained.
Though would be nice…
China daily coal consumptionbefore & after Chinese New Year (2014 – 2020)
Megatrends & C-19: Finite Earth: A short-term reprieve evident
Source: WIND
Megatrends & C-19: Finite Earth: Future implications
The focus on ESG / Sustainability will become even more important
The S & G aspects taking prominence, for now
Added pressure on Fossil fuel industry
Greater emphasis on Stakeholder focus
ie. Not only Shareholders, but also Clients; Employees & Community
Both a Risk and an Opportunity
As: Individuals / Corporates / Organisations / Governments
How one responds will ‘speak worlds’
The client / consumer response will be ’fast & furious’ & possibly long-lasting
Every aspect of our lives likely to be impacted, at least for a while
Business impact:
Not ‘business as usual’
Less Jobs!
More work from home / on-line
Supply chain management very NB
'Price' may never be the same again
Lockdown impact:
Divorces / births / depression / hunger etc
Work-life balance: Even tougher
Social unrest
Many more..
Megatrends & C-19: Demographics / Society: Likely outcomes
‘Normal’ isn’t coming back; Welcome to the ‘New Normal’…
Retreat from globalisationAt global / country level
Return of the Nation State / Nationalism
Populist / Authoritarian leaders
Retreat from globalisation
Global cooperation at risk: EU; Other
Border controls
Onshoring; Control over strategic assets
China vs US: The Cold War just got hotter
Source of C-19 & China’s role?
Will there be a winner?
Megatrends & C-19: Shifts of Power: Politics
Source: BCA
Megatrends & C-19: Shifts of Power: Playing the blame game…
A useful framework
Asset managers & allocators will need to assess C-19 impact at asset class / sector / share level:
1. Beneficiaries vs
2. Rebounders vs
3. Detrimented (Terminated/Defaulters)
Balance sheet analysis will be key
Ability to survive, at min, the next 12-18 months
Focus on: Outlook / prospect statements
Declarations of ‘force majeure’
Winning 'sector': The lawyers, again…!?
Megatrends & C-19: Shifts of Power: Asset classes, sectors and shares
And then, critically: What is already priced in?
Megatrends & C-19: Shifts of Power: Society
Society
End of Capitalism / Return of Socialism?
Or is that just ‘Crony Capitalism??
Loss of civil liberties
'Haves' vs 'Have nots'; Inequality
Coming together vs Xenophobia
Public health
Universal Basic Income (UBI)
And many more...
Socialist policies gaining precedence: Who will (actually) pay for such?
The Good:
Artificial Intelligence
Assists in tracking, testing, treatment
Big Data
Important role in prediction and early warnings
Cloud Computing
Used for modelling COVID-19 metrics
Online learning, digital conferencing
Opportunity: Digital/crypto currency…?
The Challenges:
Increase in cyber-security incidents
WHO website; Healthcare / NGO IT infrastructure
Increase in fake domains spreading false news
Increase in phishing scams
Wide-spread mass surveillance
Human rights / Civil liberty concerns
Privacy/security concerns
Plus: All the other ethical issues…
Megatrends & C-19: Technology: A likely winner, but...
versus
The good news priced in? Regulatory risk
Megatrends & C-19: Financial Repression: What is it?
“When authorities channel funds that would otherwise go elsewhere”
Examples:
Taxes
Exchange Controls
Prescribed Assets
The acronyms: QE, ZIRP, NIRP, MMT
Over-regulation
With even more to be added
Their creativity will be shocking.
US federal debt held by the public (% of GDP) 1850 - 2050
Total deficit(% of GDP) 2004 - 2050
Megatrends & C-19: Financial Repression: US public debt
By 2049, US federal debt projected to reach an unprecedented 144% of GDP
Source: US congressional budget office, long-term budget outlook, 2020
Megatrends & C-19: Financial Repression: Rulebooks being re-written
Can the doors ever be closed again? The unintended consequences?
Governments
New waves of regulation: ‘DC’ & ‘AD”
Massive new debt burdens, everywhere
Central banks independent no more
Other institutions too
Now permitted?
Constitutional breaches eg. Fed Reserve Act
Collusion
Key question:
Will CPI/ i-rates ever be allowed to rise again…?!
[As would trigger Monster IV ie. sovereign defaults]
Fiscal stimulus as a % of GDP (excluding guarantees)
37
Megatrends & C-19: Financial Repression: Rulebooks being re-written
Stock markets
Delayed reporting
Price discovery a real concern
No more 'mark-to-market?
Strong ‘moral suasion’ in play
Eg. Buybacks & Dividends
Corporates
Incentive to ‘kitchen sink’ results;
Apply for bailouts
‘Default’ on obligations; ‘Force Majeure’
Increased risk of more shenanigins…!
Increasing moral (& legal) hazard
“Many short-term emergency
measures will become a fixture of life. That is the nature of emergencies”
Yuval Noah Hariri; Mar '20
THE POST COVID WORLD: AGENDA
Backdrop
Megatrends and C-19
The post C-19 world: Global
The post C-19 world: SA
Conclusion
THE POST COVID WORLD: AGENDA
Backdrop
Megatrends and C-19
The post C-19 world: Global
The post C-19 world: SA
Conclusion
World Uncertainty Index (WUI)Global Index. GDP weighted average. 1970Q1 to 2020Q1
Highest levels of uncertainty in the past 50 years
The post COVID-19 world: Global: Uncertainty at record highs
Profile of the recovery
Recession
Trend
V-shape recovery
U-shape recovery
L-shape recovery
The post COVID-19 world: Global: Profile of the expected recovery
Warning: V-shaped is the least likely, even though many data points will look just like it!
2020Q1 saw record portfolio outflowsHit harder than DMs
Huge recent capital outflows
Weaker balance sheets; Institutions; Capabilities…
Unable to just print currency
Challenge: Unrest (today) vs controlling inflation (tomorrow)
Oil producing countries to be hardest hit
Possible upside
Low oil prices should assist many
Younger: Less C-19 impact
Infrastructure packages: Commodity uplift?
Higher Beta play into recovery
If less damaged, should recover sooner…
The post COVID-19 world: Global: Impact of C-19 on Emerging Markets (EMs)
Source: IIF daily portfolio flows tracker:
The USD: “An exorbitant privilege”, shared with many DMs, but not EMs
Emerging market currencies: YTD % change vs. US$ (9th January to 11th April 2020)
The post COVID-19 world: Global: Emerging Markets: Currency impact
THE POST COVID WORLD: AGENDA
Backdrop
Megatrends and C-19
The post C-19 world: Global
The post C-19 world: SA
Conclusion
THE POST COVID WORLD: AGENDA
Backdrop
Megatrends and C-19
The post C-19 world: Global
The post C-19 world: SA
Conclusion
The post COVID-19 world: SA: Not starting from a position of strength!
Already in recession; With worse to come
Longest business cycle downswing in history: 74 months
SARB 2020 GDP (f): (6.1%) ie. the biggest fall in SA since the Great Depression
Outlook very dependent on the lockdown ie. duration & ambit
Already amongst the worst ‘Misery index’ scores globally
Unemployment; Inequality; Poverty, and the like
Very limited fiscal room to manoeuvre
Impact of years of corruption & economic mismanagement
Recent credit down-grades
Tax revenue collapsing + Huge emergency spending; R500bn C-19 economic package
Fiscal deficit likely to exceed 10% of GDP
Worse than both WWs: -11.6% (1914); -10.4% (1940)
SA Government Debt (% GDP) 1979 - 2019
The post COVID-19 world: SA: SA public sector debt
Source: CEIC Data
The post COVID-19 world: SA: Asset class impact
SA real i-rates: Were amongst the highest in the world
Slowing economy + lower inflation (oil price) etc => Ability to cut rates
With more likely to follow.
ZAR is vulnerable, even if appears cheap
Lower rates; Weak growth; Capital outflows
SARB: Independence at risk? Recent actions? Would be a key concern!
SA Fixed Income
Poor outlook: Weak ZAR + Inflation risks (LT) + credit downgrade + increasing debt burden
Bond yields up sharply ie. higher discount rate / hurdle
SA Equities
More positive: Weak ZAR usually good for SA equities; Arguably cheap; Inflation?
Offset by: Weak economy; Weak EPS; Higher discount rates
Vital for SA to avoid debt trap…
THE POST COVID WORLD: AGENDA
Backdrop
Megatrends and C-19
The post C-19 world: Global
The post C-19 world: SA
Conclusion
THE POST COVID WORLD: AGENDA
Backdrop
Megatrends and C-19
The post C-19 world: Global
The post C-19 world: SA
Conclusion
Conclusion: Overall
We are living in unprecedented times; A discontinuous event
The second crisis in 12 years ie. we have all experienced both Monsters III & IV
Don’t waste a good crisis
Hopefully no Monster V too!
Especially with such weakened balance sheets!
Little will be the same as ‘BC’
This too will pass, but the effects will last for long after
Some aspects for only ‘12-18’ months; But others ‘forever’…!
The implications are likely to be profound:
“A GLOBAL RESET, WITH A GENERATIONAL IMPACT”
The challenges are clear, the solutions less so…
Conclusion: Capital markets
The (global) authorities are ‘all in’
They have stabilized the markets (for now); Huge post-crash bounce
SA is in a fragile position
Capital markets remain distorted
LT Implications? Inflation?
Fed response / market rally has been huge; Is it sustainable?
The tussle is between:
The poor economic data ie. the ‘real’ economy versus
The response of the authorities & its impact on the ‘financial’ economy
Plus: An assessment of how much is already priced in: Even harder
Likely a bumpy environment ahead, with volatility...
There are, however, always opportunities…
Conclusion: Some suggestions
Asset allocation remains key ie. Both SAA + TAA (flexibility)
Including currency calls
Preference for: Hard (real) assets; quality; liquidity
Key: Avoid default risk ie. Large debt/gearing is of concern
Yield is always NB, but don’t be desperate/silly!
» Many DM gilts look like poor value
Stock /sector picking will be of even greater import
Jurisdiction & taxes matter greatly
Alternate Investments can be considered, but with all the T&Cs
It remains as much about: Return OF capital, as the Return ON Capital…!
Choose: Good advisors Good asset managers
Conclusion
“…and once the storm is over, you won’t remember how youmade it through, how you managed to survive. You won’teven be sure it is really over. But one thing is certain. Whenyou come out of the storm you won’t be the same person whowalked in. That’s what the storm is all about…”
Haruki Murakami (Japanese writer)
Q & ATHANK YOU
