Businesses going global

Different times, different crises

When making decisions, it is relatively straightforward to look back in history to see how previous similar crises played out. Then respond accordingly to the current crisis, with that so-called ‘hindsight’. The reality unfortunately is that every new crisis brings nuances that prove ‘hindsight’ to be less relevant.

From the perspective of financial markets and economies it is useful to take note that this crisis is quite different in nature to the global financial crisis (GFC) of the late 2000’s. But, it does share some similarities in terms of its impact.

The GFC

The GFC originated from, and was mostly contained within, financial markets (with some spillover into the real economy). It was triggered by a downturn in the US housing market. Subsequently, across the globe, share and bond investors faced significant losses (some up to nearly 50% of their value), banks went bankrupt and some large institutions had to be ‘bailed out’ by Governments.

From an ‘economic’ perspective, that crisis mostly impacted the ‘demand’ side of economies. Or to put it in another way, with consumers feeling less wealthy as a result of falling share markets and house prices, they were less willing to spend. This in turn negatively impacted sales for businesses that produce goods and services in the real economy.

In response, central banks stepped into lower interest rates; meaning money became cheaper to borrow both for businesses as well as consumers. This not only boosted investor confidence, but also incentivized consumers to spend. As a result, in the 12 or so years after the crisis, investment markets grew at unprecedented levels, with investors enjoying stellar increases in wealth. As an example, an index that tracks the shares of companies across 23 countries had gained over 200% by end of 2019. In simpler terms, for every $1,000 you invested before the crisis, you would have had $2,039 by Dec 2019.

The Current Crisis

While the GFC originated in financial markets and spread into the real economy, the current crisis has traversed in the other direction.

In this instance, not only has the demand side been impacted but also the ‘supply’ side of the economy. The supply side refers to the production of goods and services. With social distancing measures being applied across countries and resource (e.g., talent) mobility being significantly restricted, the Covid pandemic is directly impacting on our ability to ‘produce’ goods and services.

This means a period of turmoil for businesses, with some facing an existential crisis, as well as the prospect of job losses for individuals, at almost unprecedented levels. It is still early stages in the crisis and no one has a crystal ball to divine the future or determine how long this may last.

The only thing certain is ‘uncertainty’. Unfortunately, financial markets and ‘uncertainty’ don’t get along well. As a result, at the time of writing in late March, share markets around the globe, have already sold off over 20% since the start of this year. In summary, the world is staring at a global recession in its face. Given interest rates are already low, the responses that were effective for the GFC may not be practical for the current crisis.

Lessons learnt

As much as ‘hindsight’ doesn’t make us all that much more wiser, there are a handful of universal truths that stand the test of time. This is as good a time as any to review how resilient and savvy you are financially.

• If you are relying on interest earning assets such as bank term deposits for income, you may want to figure out what else you can supplement your income with. It is very likely that returns from such assets will remain low for much longer.
• If you don’t need access to money right away consider leaving your money in what you are already invested in. Remember that any loss that your investment is facing now is simply on paper. It becomes a real loss only when you sell it. The question is how long you can afford to leave it as is, without withdrawing.
• The above is on the assumption that you were invested in it for a good reason to begin with. Get professional advice if you are unsure of why you are invested in something and how it fits into your financial portfolio. Good advice is worth the fees.
• Trying to time when to buy and when to sell is fraught with risks. As logical as ‘buy low, sell high’ sounds, it is not for the faint hearted and nearly impossible to get consistently right.
• The same goes for currency. If you have assets denominated in a foreign currency, know that your investment returns will depend not only the asset but also on the exchange rate between your home currency and the foreign currency.
• While it is always safe to remain ‘diversified’ across assets and jurisdictions, during times of extreme dislocations in financial and economic markets know that most assets get caught up, and there aren’t too many places to hide. But consider remaining appropriately diversified through the crisis.
• Various governments are taking different approaches to tackling the crisis – some are using monetary policy tools (e.g., reducing interest rates), some fiscal (e.g., using taxation related tools) and other regulatory (e.g., extending disclosure and accounting reporting deadlines). Not all of them will be successful equally. At the core of it, this is a health crisis – it is logical to focus efforts on containing that crisis as a priority. How the share markets and the investment assets in each country perform will depend on how the leaders in those countries respond. Depending on what exposure you have to each of the countries, your investment portfolios will be impacted differently.
• If you are struggling to meet your loan repayments, consider restructuring options with your bank early on. It is in their interest too to ensure that their loan to you doesn’t end up being a ‘non-performing’ one for them.
• Be wary of an increase in fraud and investment scams. Such operatives work best in times of emotional distress, playing into the ‘fear’ and ‘greed’ theory. If something sounds too good to be true, be wary. If you don’t how an investment makes money, stay away. That ‘hot tip’ will likely burn you.
• On a happier note, every crisis comes with an opportunity. Markets are driven by fear and greed. There will always be some assets that are over sold by some investors out of panic. You get to buy them cheaper now. Keep an eye out for the opportunity. But do your research first.

As indicated, we are still in the very early stages of this crisis, with things likely going to get worse before it gets better. Part of the uncertainty is because much of the recovery (and recover we will) is going to depend on the size and scope of the responses from Governments across the globe.

As a first response (which has since beefed up), New Zealand responded with a $12billion plan, the US with close to a trillion dollars and the Eurozone with a Eur750 billion package of stimulus. In reality, these amounts may still not be enough, as we don’t know how effectively each stimulus package is implemented. Only time will tell.

At times of such uncertainty, when I have to make a decision I’m reminded of a philosophical quote “it is better to be vaguely right than precisely wrong”.

Stay safe!