value and opportunity

Back in lock down mode

Four weeks after my first post of “season 2” it is pretty clear: Wave 2 of Covid-19 is definitely here and growing.

In contrast to my assumption and the general feeling 4 weeks ago, Europe is now back in lock down mode. Certain areas in the UK, Spain, France, Italy and Belgium went into different forms of lock down already a few days ago. Here in Germany I think many Germans got the message, when the German Health Minister Jens Spahn had to announce that he got infected a few days ago. 

A “lock down light” will come into force in Germany on Monday with restrictions on contacts and closure of Restaurants and Bars. Austria just announced a harder version which for instance disallows any private visits after 8 pm which in effect is a 8pm curfew under another name.

What’s different this time compared to the first lock down ?

On the negative side

– we are going into the “dark” season, bad weather etc., spring is many months away. This will by very hard on many people from a psychological point of view
– the virus came back faster and more widely than many people thought
– the “social fabric” is not as good as it was before. People are trying to stop measures through the courts, mayn people don’t think it is so serious as the hospitals are not full (yet), businesses are opposing a lot louder than in spring
– the virus is more diffuse, contact tracing doesn’t really work any more, neither does the app
– countries that have done well during the first wave are struggling much more now (Switzerland, Austria), countries that had issues in wave 1 are having the same issues all over again (Spain, France)
– it is still not clear what measures will have what kind of exact effect on the spread of the virus, so Governements are still in a “trial and error” mode

On the positive side

• vaccine development seems to have progressed well and vaccines might be available either end of this year or beginning 2021. The official availability as such a vaccine could be already a huge positive psychological factor on its own, independent from the actual possibility to get the vaccine
• masks, disinfectants etc. seem to be available in enough quantities this time, protecting the all important health system (doctors, nurses etc.=
• deaths (so far) seem to be somewhat lower for whatever reason as initially feared however the mortality is still multiple times higher than the normal flu
• some learning from the first lock down went into lock down 2: Schools, borders etc. remain open (and parents don’t have to stay at home), so the all important economic life will not be as disrupted during lock down 1.
• So far we haven’t seen as drastic pictures as before lock down 1, so maybe this time we are early enough to avoid the collapse of the health systems in many countries
• and most important for many Germans: there is still toilet paper available in my local drug store (although they have eliminated the XXL double packs)

However, in aggregate I think that the this “lock down light” will unfortunately buy us less time as the first one. First of all it is less drastic and secondly I am not sure how widely the measures will be followed.

I think it is fair to assume that these measures will stay longer or even might need to be intensified in the next few months. In a best case scenario for Germany, in late summer all people who wish to have the vaccine will got their shots, a more realistic one would be somewhere in autumn.

At least Christmas will look very different this year in my opinion. Many physical businesses that rely on Christmas business will suffer. I can’t imagine that for instance Restaurants will be open for pre-Christmas office parties etc. and Amazon for sure will have another big quarter.

The markets

The open question remains if and to what extent all economic activity will rebound to levels that we have seen before the pandemic or if this one year plus x period will leave some lasting effects. What we have seen so far have been more an acceleration of existing trends E-Commerce, home office etc.) but no one actually knows what this means for instance for office real estate in 3-5 years.

Although the increase in infections had been clearly visible for some weeks, the markets reacted only negatively in the last week. It seems that the announcement of lock downs, no matter how light they are, seem to have triggered some rethinking with many market participants

After an initial rebound, especially many travel related stocks now trade lower than during the “Corona crash”, indicating that at least for tourism/hospitality things might rebound maybe only in 2-3 years and maybe not all companies will survive. 

Especially if the US elections turn out ugly, I am pretty sure that Central banks have already prepared something as well as additional and significant Government stimulus, especially when it becomes clear that the Christmas season will need to be skipped this year. So far, these coordinated measures have done the trick for stock markets and there is no reason to believe it will be different.

The biggest structural risk in my opinion would be a significant delay in the introduction of a vaccine. Year End 2020/early 2021 is now the general opinion when this vaccines are shipped and any delay let’s say more than 3 months or so could turn ugly.

In the short term, another round of “Bergamo style” pictures from overflown hospitals could clearly also create troubles and lead Governments to harsher, more harmful versions of a lock down.

Portfolio Management

As my readers know, I am not a big fan of market timing. However I cleared out some of my shorter term bets (Play Magnus, Sino, JDC, SHS) as for me, it is easier to go through high volatility with positions where I have long term trust into the underlying business and management. My 8% position in Grenke bonds is maybe the only remaining position where I would get uncomfortable if we would see a big draw down in the market (-20% or more) as I am still not fully convinced how the business model will do when defaults of businesses will be allowed to happen again.

Although I am tempted to short some of the shittiest SPAC deals, I will abstain because it is impossible to say if any of theses stocks gets pushed into Nirvana. From the past I also know that my investor mind is not fully compatible with short selling.

As a friend mentioned, one should be prepared to “ride the elevator through the lowest level of the basement” with an existing position before it eventually might go up again.

I have a few stocks on my watch list here I would either increase the existing position or start a new position before the end of the year if valuations would go down significantly. Especially if for some reason we would see a year end sell down as in 2018, this could open up some long term opportunities. With a current cash allocation of around 16,5%. I have the flexibility to add 1 or 2 new positions and/or increase some positions significantly.

Stay health and stay calm !!!!