Much has been written about the effects of the virus on the world and on the stock market. Here is one analyst’s take on some of the likely impacts on the way we should look at companies. This article was originally produced as a blog, “10 Changes Post Virus”, which was published a few weeks ago.
I have discussed the impacts in two areas – the broader macro picture and what this means for companies. Under macro effects, I discuss financial repression and capital controls, why interest rates will stay low for some time, and what this means, some potential ripple effects, including the potential for inflation, and the need for balance sheet restoration by both corporate and personal sectors.
I then discuss the implications for companies and equity investors, looking at the consequent likely greater desire for stronger balance sheets by the corporate sector, the need to onshore elements of the supply chain and the implications for equity valuation, working capital and income funds. Finally, I discuss how this will lead to corporates 'kitchen-sinking' reserves, and why we believe one result will be that more fraud is exposed.
The COVID-19 pandemic has obviously been a massive shock to the financial system, and one clear effect is that almost every government on the planet is likely to have a lot more debt in June 2020 than it did in January – and likely even more by the end of the year. Add to this that the situation at the start of 2020 was not looking particularly attractive, in any case.
Advanced economies saw a significant increase in debt, above 100%, post the global financial crisis of 2008-09. Reinhart and Rogoff, in their famous book, This Time Is Different: Eight Centuries of Financial Folly, advocated caution that debt above 90% of GDP would slow economic growth. Their statistics and conclusions were then undermined, when it was found that there was a mistake in their spreadsheet. It was always unlikely that two academics could predict future economic events on the basis of historical trends.