value and opportunity

While I am writing this, the first vaccine shots have been being provided in Germany already yesterday. Despite a relatively strict lock down including a curfew from 9pm in my home town Munich, in general the mood seems to a certain extent upbeat compared to a few weeks/months ago. Time to do a “2020 Covid-19 recap” with another installment of the “Panic Journal”. 

Recap: This time was different

At first, like many “Westerners”, I thought that Covid-19 was not our problem. Like SARS in 2002/2003, MERS in 2012, Ebola 2014-2016, Zika 2015 or the Avian Influenza , this again looked like a “Third World problem”, where the Third World includes China. The first documented cases in Germany at car supplier Webasto seemed to have confirmed this: The infected persons were identified quickly, isolated and all recovered pretty fast. Webasto actually issued a press release in early March that all infected employees were healthy and eager to go  back to work. So “Business as usual” with this “Exotic virus scare”.

Looking back, I think the picture changed drastically with the pictures from the Italian town Bergamo which triggered the first lock-downs and in parallel the dramatic drop in the stock market from mid-end of February. In pretty short time, everyone went in to full panic mode. People suddenly realized: This time it’s different. This one doesn’t stay in the Third World (where it belongs…..) but is already among us.

Available numbers especially from Italy and China were interpreted out of context, such as “case fatalities” which showed both in Italy and China that up to 10% of people who tested positive died. In this first few weeks of March, it was really really hard to get a grip on what was actually going on. How does the virus spread ? How deadly is the virus etc. etc. 

Some people claimed that there will never be a vaccine because so far there was no vaccine against Corona viruses etc. Then two things happened: As often, US authorities acted quickest, with the Fed leading the emergency measures supported by a big stimulus package from the US government which was followed by similar measures around the world.

Secondly, especially in the hardest hit areas, the lock down showed its effects and infections declined, also aided by the arrival of spring. In addition, more and more studies painted a more realistic picture: Although the virus was highly contagious, “only” 0,5-1% of the infected persons died, compared to estimates of 10% or more in the beginning.

In summer it really looked like that “after the hammer“, the whole Covid-19 thing was pretty “easy dancing“, despite warning from virus experts that the next wave in winter might be (a lot) worse. Unfortunately this also lead to pretty careless behavior of the population.

Then in late autumn, es predicted by the experts, the second wave hit in Europe and it looked worse than the first one. Europe went into (soft) lock downs once more and even the markets were starting to crumble away, also because it looked like that Trump might actually win again.

Then one week later, people suddenly “could see the light”: Biden won the election and Pfizer/BioNTech announced the very convincing phase III result and promised that the vaccine is ready by year end. And they delivered. Plus, just a few days ago even the hard Brexit could be avoided via a last minute agreement between the EU and the UK. Even news on some form of mutation of the virus could not stop the positive sentiment especially in the stock market.

Where we are now and what is next ?

The famous saying is that predictions are especially difficult if they relate to the future. This here is no different. So maybe let’s start what we have learned so far:

• Covid-19 was not a black swan but a maybe a “grey swan”. The first world was so far lucky not to get any of these predecessors
• However, with mRNA humanity now seems to have a technology to develop and produce vaccines in very short time. It will be interesting to see what else they can tackle with mRNA technology.
• Many businesses managed it pretty easily to function with a fully remote workforce. 10-15 years earlier, this would have been a much bigger problem
• Interestingly, the often mentioned wonder cure actually existed in the form of a very expensive and rare antibody treatment, however only the US President and his close friends seem to be able to access it (this explains maybe also the mask thing)
• The World’s big institutions prevented a economic meltdown by a coordinated effort of Central Bank and Fiscal stimulus
• Especially the fiscal stimulus was very generous. In the US, many stimulus recipients made more money being unemployed that they made when they were actually working. In Europe, for the first time a European stimulus with European funding was agreed
• Especially in Europe, bankruptcies were actually lower than in previous years as the Governments either helped directly via loans (Lufthansa, TUI) and/or suspended bankruptcy laws
• In most countries, a surprisingly large number of people did somehow either not believe that the virus exists or thought that they need to show their general anger by demonstrating and/or not following emergency rules. This was supported by politicians like Trump and other “trump like” populists like Bolsanaro, BoJo etc.
• Within the economic sectors, there were huge winners (everything digital, home improvement etc.) and big losers (Malls, Hospitality & Leisure etc.) 
• Overall stock markets priced in many factors (probability of vaccine, who gains who loses) quite rapidly after the “crash”, long before the public opinion came to more or less the same conclusions which led of course to the interpretation of a “disconnect” between the stock market and reality. AT the time of writing I would say that the market was actually quite efficient, with the exception of some “bubbly” areas such as SPAs, EVs etc.

 That leaves us with the big question: What will happen in  2021 ?

• There is clearly a chance that in 2021, once again “animal spirits” will kick in in full force and people will keep spending and businesses will once again start investing, creating a big demand push which will then turn into a massive economic rebound
• However there is also a certain probability, that all the problems that were deferred into 2021 will actually hit in full force. Part of the European economy was already in recession in late 2019 and might not be saved by an rebound 
• On a more granular level, it is still not clear how many doses of vaccine will be available at what time. If for instance Southern Europe would miss one more tourist season because of a slow vaccination process, things could become really difficult there. I also expect that a “vaccinated status” will allow people to do certain things that “non-vaccinated” people can’t do. The pressure from the economy to allow vaccinated people to behave “normal” is just to big and long distance flights will only be the beginning
• However the big open question clearly is: What scenario is priced into the market with what probability ? This is clearly something that we will know by the end of next year

Again the question: Permanent effects ?

For me it is still not clear what the permanent effects of this “episode” will be, however I am sure that there will be longer lasting effects. As I mentioned sometimes in the past, it is not too smart to look at ones own behavior and then conclude that everyone else.

However working from home is clearly something that will stay for those who can actually do it. Yes, if you are a super ambitious career guy/girl, you will go back to the office every day. But for everyone else, especially people with family, working from home or another “non-office” location will stay to a certain extent. This was a trend that has been there already and especially with younger colleagues I observed the wish to work from different locations already a few years ago. Being at home on average 2 days a week for a majority of office worker could have a major impact on everything from office rents to downtown businesses, transport, business travel etc. etc. 

Also the push into digitization will not be reversed. E-Commerce is here to stay and retail needs to become much more creative to pull back customers. A super interesting area in my opinion is the energy sector. The economic slump has hit the already beaten up oil companies a lot. Will they benefit from a rebound in oil prices or will the “Electrification + Green energy revolution” supported by multi-billion Government support packages finish them off for good ?

While writing this, it becomes clear that I have no answers but even more questions. To me it is also clear that at this stage, looking back into history and saying: “After a pandemic, this and this is going to happen (Inflation, GDP, technology etc.)” doesn’t make a lot of sense. There are so many unique factors at play that things, as with Covid-19, might be really different this time. 

Summary:

Somehow, almost every year end review for me ends with an in principle cautious but positive outlook. There is clearly a case for a strong recovery and maybe another bull market, but there are also significant risks and not every sector will “revert to the mean”.

Therefore my strategy will remain at it was in the past: Don’t try to time the market, invest into strong companies with “adaptive” leadership and focus on the future.