“First, we must preserve and save lives. Then we must preserve and save the global economy.”.
What do we KNOW about COVID-19?
COVID-19 is the name given by the World Health Organisation (WHO) for the disease caused by the novel coronavirus SARS-Co V2, first identified in Wuhan, China in late 2019. It is an acronym for corona virus disease of 2019.
There are only 7 coronaviruses known to cause disease in humans:
Four human coronaviruses cause symptoms of the “common cold.” These are named 229E, OC43, NL63, and HUK1.
The other three human coronaviruses cause much more serious lung infections, or pneumonia: SARS-CoV in 2002 (severe acute respiratory syndrome or “SARS”), MERS-CoV in 2012 (Middle East respiratory syndrome or “MERS”), and SARS-CoV2 (the current pandemic know as COVID-19).
“Novel” means that it is a new coronavirus previously unidentified in humans. So, it is new and different from the others. Like SARS and MERS, it is a zoonotic disease. This means it is one that begins in animals and is transmitted to humans. Scientists suspect that Covid-19 may have come from bats because bats appear uniquely able to harbor many viruses that cause serious human disease: Ebola, Marburg, Rabies, Hendra and Nipah. We can now add Covid-19 to that list.
Covid-19 is a very serious but it becomes most serious because of what it can precipitate. Most deaths occur from secondary bacterial infections, sepsis and kidney failure, often exacerbated by strong antibiotics that can be toxic to the kidneys.
What we do know is the mortality rate of COVID-19 is at least 10 times greater than seasonal influenza. Overall, currently, 3.4% of reported COVID-19 patients around the world have died, according to the World Health Organization.
One piece of good news is we know the weight of the virus. It is physically larger and heavier than other known respiratory viruses. This limits its ability to travel through the air. Covid-19 can only travel about one to two metres, or seven feet before gravity takes over and it drops to the floor. Other viruses such as measles or chickenpox can stay airborne because they are lighter and can be carried on tiny dust particles.
What we know is globally there have been thousands of deaths and this number will eventually, if not rapidly go into the hundreds of thousands with or without drastic action. Without action we know this has the propensity to kill millions.
What do we THINK will happen with Covid-19?
It is very difficult to forecast the numbers and geographic spread, together with the mortality rate. Contrary to initial expectations, the spread of the virus around the world is not following the China (outside Wuhan) or Korea experience. Or for that matter Singapore or broader Asia. The European experience is more like the Wuhan or worse the Hubei rates. The US would appear to be conforming with Europe. It looks like the US and Europe are heading towards 1,000 cases per million of population like Wuhan.
Goldman Sachs concluded recently that 50% of Americans will contract the virus (150m people) on a par with the common cold. The next most relevant industrial economy is Germany where 70% will contract it (58M people). Of those impacted 80% will be early-stage, 15% mid-stage and 5% critical-stage.
With a mortality rate of circa 2%, heavily skewed towards the elderly and immunocompromised this means up to 3m people will die worldwide.
It’s estimated we won’t have a vaccine for 12–18 months.
What we KNOW about Covid-19 and the global economy.
Coronavirus is both a public health problem and an economic problem. The measures being taken to save lives necessarily mean shutting down large parts of the consumer-driven economy.
We also know it has and will continue to severely impact the supply or manufacturing side of the economic equation. People are losing jobs and businesses are losing revenue. This is known as an “externality” induced shock to the economy.
Does that mean we should simply ignore the virus and let people get sick and possibly die? No, because the global healthcare system can’t handle what would happen. It would collapse and be unable to help anyone with anything.
The global economy needs to be sustained for however long it takes to beat the virus. We know that means massive fiscal stimulus spending. We are going to have to do for everyone the kind of things that have long been implemented for natural disaster victims: emergency grants, subsidized loans, exemptions from rules, and more. We know this means massive very significant increases in Government and global debt. There is no choice.
What do we THINK the impact on the global economy will be and what will it look like post Covid-19?
The Covid-19 pandemic has very quickly hit global economic activity and caused a world recession. While the virus is perhaps abating in Asia, Europe has become the epicenter of the outbreak and now there is a significant outbreak in the U.S. and Canada.
The current recession has the propensity to develop into a depression. It won’t because Governments in every major economy will guarantee unlimited fiscal compensation for lost revenues and wages. Maybe not 100% but say 75%. They will pump liquidity into the nooks and crannies of the economic system.The result is we have zero interest rates, low inflation and we have become tolerant of unprecedented levels of national debt and borrowing. The financial system as such will not fail, even if we end up with “helicopter” money. For many years the stresses and financing burdens of battling Covid-19 are going to severely compromise the internal and external financial systems of the developed world and particularly Europe, with its weak economic starting point.
In the absence of a most unlikely financial system collapse or crisis, there will be a recovery. The question is when, how fast and of what magnitude. If we use pre Covid-19 expectations for GDP growth I would summarise the outcomes as the two below. There clearly are more. They are sourced from different research houses including McKinsey Global Research Institute to Goldman Sachs.
- Rapid and strong public health response. Virus spread controlled in each country within 3 months. I.e. Virus contained and slow recovery.
|Real GDP drop 2019 Q4 - 2020 Q2.
|2020 GPD Growth.
|Return to pre-crisis level|
- Healthcare systems succeed in containment but not sufficiently to stop a second or third wave. Consequently, social distancing continues regionally for 6 to 8 months. Equals slow long-term growth with very subdued global growth.
|Real GDP drop 2019 Q4 - 2020 Q2.
|2020 GPD Growth.
|Return to pre-crisis level|
What do we THINK the outcomes will be post virus?
What will not change are the powerful secular megatrends:
- Economic power
- Scarcity of resources
However, I would particularly highlight the following:
Healthcare: In most economies, the healthcare system has little changed since their creations post World War 2. Now they will need to determine how to meet such a rapid surge in patient volume, managing both in-person and virtual care.
In our interconnected and highly mobile world (5G), we must rethink the speed and global coordination with which we need to react. Policies on critical healthcare infrastructure, strategic reserves of key supplies, and contingency production facilities for critical medical equipment will all need to be addressed.
Education: Educational institutions will need to consider modernizing to integrate classroom and distance learning.
Social: These will range from working from home to large-scale surveillance (5G).
We will see an advance in Digital Identity Cards. The further growth and use of digital payments and contactless. For me, this will be much like the aftermath of 9/11. 9/11 forced much heightened security through scanners at border control points. So, we may get thermal scanners at airports and sea ports to identify those with high temperatures to be sidelined for testing.
Consumer: A shock of this scale will create a big and lasting effect in the preferences and expectations of us all as citizens, as employees, and as consumers. As above, the online world of contactless digital commerce and e-commerce will be much strengthened in ways that will change consumer behavior forever. It is happening as I write.
“Will coronavirus spell the end of cash in Britain?”
“Fears around the virus being distributed to notes and coins has led to many businesses sticking to contactless payments for the time being”
Work life: From Alibaba to HSBC and Google to Unilever, companies around the world are telling staff to work from home in a bid to combat COVID-19.
This remote working on the current scale is unprecedented and will leave a lasting impression on the way work forever. This will supercharge growth in mobile digital office facilities. “The virtual office”. The “Business in a box”. This is will be empowered by Software as a Service tools. 5G will aide this acceleration. The Cloud service providers will experience significantly increased demand. IT infrastructure will need enhancing at national and company level.
Security concerns will add other complications to the technology side of remote working and will have serious consequences.
What do we THINK this all means for savers, pensions and investors?
- Interest rates will stay low (0%) for a lot, lot longer. Possibly 3, 5 plus years. The income returns from Fixed Interest will remain unappealing to capital destroying for longer. The hunt and demand for income continues and gets more demanding.
- We have learnt that “fireproof” funds are not “fireproof”. These absolute return funds supposedly designed and constructed to protect savers from market shocks do not. The BMO Global Equity Market Neutral fund fell 33.5% between 1st January and 6th March. One of the largest now has an annualized return over 3 years of -6.5%.
- The violent market correction has demonstrated that an index tracking or passive fund investment is exactly that. Some areas of the market have been less impacted while oil stocks are down 40% 50%. You own the market and all of it indiscriminately.
- Having identified the above, active, traditionally managed funds have not covered themselves in glory. Some have appalling returns.
“Only when the tide goes out do you discover who's been swimming naked.”
The Pareto Principle:
The Pareto principle states that 20% of the inputs are responsible for 80% of the outputs. It's named after Italian economist Vilfredo Pareto, who in 1906 found that 80% of the land in Italy was owned by 20% of the population.
In the US, Morningstar, identified that only 7% of U.S. large-cap mutual funds have outperformed the S&P 500 index over the past decade. It is similar in the UK and Europe. Why? Well in the States, two thirds of stocks underperformed the index. 40% of these gave a negative return. Between 1926 and 2015, the S&P 500’s outperformance to Government Bonds was attributed to the best performing 4% of stocks.
So, what’s the lesson?
- Accept there will be disappointments, like all decisions in life. Things go wrong. When they do, recognize and in the case of a stock, sell and move on. Much the same as life.
- Increase your chance of success by owning a vital and limited number of stocks. 30 to 35.
1. Mistakes commonly made.
- Sitting on the side-lines
- Catastrophic risk /economic externalities (Covid-19)
- “Investing” in commodities (currently oil)
- Excessive stock picking and trading
- Focusing on Emerging Markets
- “Emotion” – “stocks you like or fall in love with”
We need to find just a few, 30 to 35 companies we can have faith in. That will ride the unforeseen such as today’s world. The strong and it is the strong that capitalize in distressed times. They gain market share in their products and services. And we need to be global.
We need to be invested in those undeniable global megatrends.
Where are these vital few? Well let’s start with your (for 2) average weekly shopping basket:
Let’s create a portfolio comprising of our above shopping basket:
Now let’s introduce the concept of compounding. This is the process in which an asset's earnings, from either capital gains or income (dividends) are reinvested to generate additional earnings over time.
This demonstrates the benefits of generating income from equity markets:
- Get paid to invest
- Historically dividends have provided 43% of the S&P500 total return.
- Dividends provide an ongoing return while waiting for capital appreciation
- Capital preservation
- Generate an additional income stream
- Inflation hedge
- Reduces risk & volatility
- Compounding returns
“Compound interest is the 8th wonder of the world”
The below assumes an average 4% per annum dividend growth versus historic 3 year of 8% and assume 5% average stock price appreciation. The US market has since the Great Depression delivered an average of 10%. Then let’s add $250 per month on top of reinvesting the dividends.
The stock price does nothing and dividends do not grow. But $250 monthly contribution continues.
How about stock prices go down an average of 2.5% per annum (very unlikely) and you keep reinvesting and no dividend growth. Regular $250 continues:
How simple is it. Is the stock market cheap today? Probably. But actually, I want it to stay cheap to give me more time to benefit from the most powerful law in mathematics. The point is the income you receive at the end of the period. It more than pays for our shopping at the very least. Stretch it out more years, then greater the return and terminal income generation.
Just follow my 12 Rules