COVID-19: Private Markets Impacts - Investment Beliefs
Updated: Sep 17, 2020
Re-evaluating fundamental investment beliefs
by David Hunter - Founder, Haven Green
(all sources acknowledged and links thereto provided without any recommendation, warranty or liability)
The COVID-19 crisis is, in our view, a catalyst to some deep societal changes, or more accurately an accelerant to those that were already underway. As with the early stages of the pandemic, many of these changes today remain unappreciated by both citizens and investors, and, to the extent they persist, will have major implications for us all. We believe that investors who actively consider these changes earliest stand to reap the best rewards for their stakeholders.
We therefore set out for you below some resources and links that we’ve found useful in stimulating a re-evaluation of our fundamental investment beliefs. We hope they help you and your colleagues also in that important task.
Firstly though, here’s our own summary of the key "big picture" macro thoughts and themes arising from or impacted by the crisis that we already see morphing into different attitudes and behaviours for individuals, countries and governments. Should these themes persist, the world will be a very different place in the future.
We see the COVID-19 crisis as an accelerant of existing trends, and a catalyst for some new ones.
There’s no going back. A convulsive, collective social experience is usually a game-changer. The world after the 2008-09 GFC was different to before; that which emerged after 9-11, also unlike the prior period. Beyond COVID-19 (if, like “post-influenza”, such a point can ever be reached) will also be unlike the world we knew beforehand. "Let's lift the lockdown and get back to normal?" Define "normal".
The early forward path (over the rest of 2020 and into 2021) for the economy is likely to be the characterised as “The hammer and the dance”, a “whack-a-mole”, repeated suppression-and-lift of declining impact at each turn. The key early political challenge is for leaders to release countries from the current (first) lockdown and set expectations so carefully that any subsequent need to withdraw again from social activity is adhered to by the requisite population group, whether that be all society or just age, sector-specific cohorts.
We believe a V-shaped recovery is highly unlikely, more wishful thinking and a denial of the reality, rather than even marginally realistic. A softer L-shaped path for at least 12-18months is in our view more likely, with a turn up at the end of the horizontal; growth numbers appearing then, from a low base, will look high and encouraging, but a huge chunk of our previous economic capacity will have been eroded and a full recovery from that will take many years.
(While this publication is focused on private markets, the public markets also reflect the same economy and the two are not disassociated – at the macro level, a distinction is academic. Nevertheless our brief comment on the public markets is that a substantial bear market has begun, irrespective of equity markets’ current, we believe temporary, support. We expect a further collapse, or several, as the bear market takes hold. The key force arranged against this prospect is formidable; it’s the Fed, other central banks and the governments of the world.
The US in particular has some decent room for fiscal manoeuvre. Nevertheless we believe the “Long Now”, a policy of rescue, initially necessary to save the economy post 2008-09, but extended beyond its useful worth since then, wherein we suck forward economic productivity and wealth from the next generation to save our “today”, has its limits. We believe the major challenge facing long term investors today is to identify and prepare one's portfolio for the key catalyst(s) or shock(s) to the system that will break the dominance of this “whatever it takes” narrative. The policy tools of that narrative are currently disrupting and undermining the benefits of capitalism, polarising populations through rising inequality and accelerating social instability. We believe such tools have natural limits, such as a political shock, "unexpected" inflation, war, a refusal by international (especially Chinese) investors to hold US dollars or buy more USD debt, civil revolution or something else.
Political systems also have their natural limits. The key one to watch of course is the US in the 4th Quarter, either side of the presidential election (and not so much the election itself). This event, assuming it even takes place on time and in a traditional manner (if for example there's a material COVID-19 "second wave"), will drive a strong positive fiscal and central bank narrative throughout the rest of 2020 up to that point, led by the incumbent Trump. The election itself, potentially needing to be carried out in a social distancing manner or amid state lockdowns or a high daily deaths tally reporting environment, could be volatile, socially disruptive, and could further damage the performance and social fabric of the world’s largest economy. This mish-mash will be further complicated by the huge disparity in COVID-19 experiences (and yes, death rates), as between the states. On the other hand, it may go off like a dream!
Our current US election thesis, based on what we see as a weak leading Democratic party candidate in the oft-incoherent Joe Biden (it says much when your campaign team believes that your best strategy is to stay away from live interactions on camera), is for Donald Trump to secure another four years in the White House. Could COVID-19 be Trump’s Katrina? Possibly, but we feel his marmite relationship with the US voters will merely strengthen in its polarisation, rather than convince voters on one side or the other to rethink their position. High death rates, particularly if / as a second wave develops post release of the current lockdown, could perhaps change this view. When you lose a loved one, and think that loss could have been prevented, things get personal.
We’re not optimistic about a good vaccine being developed quickly, if at all. The track record on vaccines for coronaviruses is consistently poor over the last 25 years, and not for the lack of trying. The flu jab I get each year is usually effective at 40-60%; and I need to get a new one each year! I’m also sceptical at this point on the long-term efficacy of antibodies, although expect the WHO to announce that both antibodies are produced and the SARS-CoV-2 virus appears stable (ie mutation risk is “low”). It will take a lot of back-up evidence and time for me to be fully convinced of either route to a worldwide scale defence to this virus, let alone others. I remain hopeful of being convinced. I hope.
On the other hand, we are very optimistic that further COVID-19 treatment improvements and intelligence, non-pharmaceutical interventions and other factors will outperform any virus mutations and pharmaceutical developments. Humanity is fighting back hard, as if for its very survival….but then again, so is the virus!
In our central case scenario, there is 2-3 years ahead of economic struggle, which is more than enough to change the prevailing macro-economic, individual business and political models. Lightly capitalised technology disrupters in every sector are already waiting in the wings for most industries to trip up, eager to eat their lunch. Mass human behaviours are changing rapidly before our eyes. No businesses are unaffected. A moment of deep social disruption has arrived.
The world will prepare and restructure significantly for continuing pandemic management, of this SARS-CoV-2 and any other subsequent pandemic. This preparatory, “precautionary principle” attitude will be replicated throughout society, impacting spending today and bringing to an end in many quarters the dominant theories of economic optimisation and upside efficiency. A collateral victim will be globalisation, already on the wane. As “saving for a rainy day” comes back into fashion, at both the macro and individual level, this approach, less “efficient” in the short term, will sacrifice theoretical upside in the more traditional/current sense. “Growth” and growth expectations will be severely downgraded, even before we think about the raised taxes needed to pay off today’s bailouts, and fund the insurances that society will demand for tomorrow.
Social capital awareness and management will rise in importance. The best summary of this hitherto under-appreciated social asset we’ve seen is from Andy Haldene, Chief Economist at the Bank of England. Echoing a point I made at the start of the crisis here ("That which cannot be counted, counts for a whole lot at this time"), Andy states that societies need to "better recognise the unpaid contributions citizens make" and says wisely, "We need to invest the rich endowment of social capital created by the crisis, by rethinking and rebuilding the institutional immune system that is our social sector".
Resources and links to help you think further about some potential fundamental changes that the COVID-19 pandemic may accelerate or initiate, their investment implications and key second order investment opportunities arising therefrom are set out below.
Some Big Picture Articles
The following sources have been particularly helpful in developing our thinking around the situation.
Epsilon Theory – Every day, Epsilon Theory runs the world's financial news through natural language processing-based cluster analysis to identify the most on-narrative stories.
Ben Hunt and Rusty Guinn produce some of the best investment writing on the web (in our opinion). Challenging norms, behaviours and identifying the dominant narratives being set for mass consumption, the team are passionate about doing the right thing. Second Foundation Partners, the publishers of Epsilon Theory, are committed to real change in the practice of investing and the practice of citizenship.
Three Body Capital - A weekly briefing with insights that “go beyond the obvious”.
A relatively new bunch of UK investors, developing an investment business from several interesting perspectives. Crisp, fresh, ground-up writing and thinking.
Peak Prosperity - “insights for prospering as our world changes”.
Early onto the SARS-Cov-2 pandemic and continually ahead of the curve. Best investment suggestion to date? “Plant a garden.” Excellent daily updates.
Covid-19 Specific Articles
My own early efforts at considering and capturing the impact of the pandemic. CoVid-19 coronavirus. A black swan’s potential impact on pensions, society & geopolitics.
London Business School
The economics of a pandemic – the case of Covid-19.
UK - HM Government COVID-19 website
Imperial University COVID-19 Modelling Report
A really good store of various useful resources.
“Making world statistics available in a thought-provoking and time relevant format”, one of the best free reference websites in the world.
Consistently excellent stats, presented creatively.
Medcram’s Covid-19 Youtube channel
Medcram’s Youtube special COVID-19 channel with critical care specialist Dr Roger Seheult illustrates key developments about COVID-19 and SARS-CoV-2 pathophysiology, transmission, prevention, treatment options & trials, vaccine advances, data trends, as well as the response from governments, hospitals, and communities.
Dr Seheult gives excellent daily updates, with really accessible, often hand-drawn, graphics bringing you up to speed to an A-level standard or beyond with the detailed medical aspects of understanding the virus. Fascinating.
More Writing on our Changing Society
Charles Eisenstein – the Coronation (Mar 2020)
“For years, normality has been stretched nearly to its breaking point, a rope pulled tighter and tighter, waiting for a nip of the black swan’s beak to snap it in two. Now that the rope has snapped, do we tie its ends back together, or shall we undo its dangling braids still further, to see what we might weave from them?” This essay asks all the right questions….and more.
Google Collaborative: 2nd Order Effects
“Second-order effects are often surprising. Who would’ve thought that cars would eventually lead to hotel and restaurant chains?” A potentially interesting collaborative approach to capturing 2nd order effects of COVID-19’s changes in behaviours. Possibly limited by the contributors (by definition), but ambitiously expansive.
Unherd – Will Gen Z recover from Covid?
“'Zoomers' will enter the workforce against the backdrop of both the Great Recession and the Great Lockdown.” Having experienced not one, but two, “1-in-a-100 years” events in just 12 years, for me, this is the social demographic likely to be at most risk of justified radicalism. Unherd examines this prospect with a critical eye.
We highlight below the following key medium-term themes we are contemplating and hope to address in forthcoming articles:
Minimax Regret Thinking (ie Minimising the risk of one's Maximum Regret outcome)
The end of efficiency optimisation's dominance and the beneficial role institutional investors can play in advancing socio-economic philosophy
The end of globalisation, a renationalising of key industries
The continuing battle between pooling and individuality
Increased demand for insurance
Lower growth, but potentially lower volatility too
Awareness of the diminishing signal output value and importance of GDP
The limitations and dangers of modelling and reliance thereon
China – managing internal expectations and external relationships when bumping up against the limits of “unlimited” growth and expansion. The call for COVID-19 reparations and geo-political implications.
The declining credibility of managers, politicians and economists, journalists, media and other institutions. To what extent are we really now “on our own”?
“Nothing-currency” (celebrities, fluff/indulgence – tv chefs, F1) vs the food, health and energy resilience that really matters, when the proverbial hits the fan.
Polarised populations…on steroids.
Gen Z (25-35 year olds) – in the next 10 years will they be pliable, compliant or revolutionaries? Zoomers beyond Zoom!
The Revised Importance of Basics – work/life balance, more home living and working, rediscovering family and community values.
Tech morality challenges: monopolies and the further trade-offs of rights in individual privacy vs “the general commons good” – this one hasn’t gone away, its just dropped down the agenda.
Climate change concerns and the fallout from COVID-19. Climate change’s thematic prominence, currently and temporarily diminished, will rise again. Learnings from COVID-19, its sources, management via lockdowns and changed behaviours, as well as dangerously rising inter-generational and social tensions, will stimulate further, not dampen, the debate.
Epilogue: This Time It’s Personal
David Hunter - Managing Director
Here at Haven Green, we’ve been following the SARS-CoV-2 coronavirus pandemic closely since late January. Unlike the 2008-09 Global Financial Crisis, or even the Great Depression of 1929-30, this time, for nearly every human being on the planet, it’s personal. In my own case, two of my immediate family are COVID-19 vulnerable due to immune-deficiency issues and I have 10 elders in my wider family, close aunts and uncles, including my mother, all in the high-risk demographic category. Currently part-way through a 12-week isolation in the UK, one has been fighting stage 4 cancer for the last 2 years.
In 2007-08 I was substantially unaware of the nature and consequences of the mortgage-backed securities market. After Lehman Brothers collapsed, like many investors, I began quickly to get to grips with the subject and over the course of the next year or so got up-to-speed (-ish) on most of the critical impacts and relationships, particularly with respect to bank regulatory capital. In this crisis, I’ve been somewhat early, in part led by a number of individuals I’ve followed online for a few years now, whose investment thinking generally has either coincided with my own views (without apology, in true online "echo-chamber" fashion) or more usually has added significantly to my understanding of the world. Links to a number of them are included above.
Thereafter, my fear of personal family loss has driven me to be as fully on the case as possible. This is me, minimising the chances of my own maximum regret outcome - that I lose a loved on to COVID-19, before "their time". Most specifically I’ve investigated the biology of the SARS-CoV-2 coronavirus, its effects on the human body and available or potential mitigants in perhaps as much depth as a non-medical person can. For, as in 2008-09, in order to survive the crisis economically (and this time around physically too), in order to win this war, we should aim firstly to know the enemy and then if at all possible to subdue it without fighting (as per Sun Tzu’s “The Art of War”).
We hope you enjoy and benefit from the above and would be delighted with your feedback.