Article #35 by Vincent E Rizzo - Published Monthly

It has taken me days thinking about how and what to write about given that the difference between the time of writing and the time of publication of these articles may seem an eternity in the current surreal circumstances where conditions change by the hour! Furthermore, writing about the inevitable and pretending to know more at a time where news flow, statistics and fresh information are being splashed out quicker than it takes us to wash our hands, makes the timing of this month’s article a harder one than most.

Nevertheless, in an attempt to stick to what we hope to know better, today’s write up will focus on the ‘what next’ in the context of capital markets. What next? Most definitely volatility and uncertainty. That is an undebatable fact at least in the short term and dare I add medium term too.

There is nothing that markets dislike as much as uncertainty. And at this point, it is hard to see how uncertainty could be greater. The world’s major economies (and Malta too naturally) have voluntarily and responsibly I’d say, temporarily shut down large tracts of activity. They have effectively chosen to impose a recession (or almost) upon themselves, correctly judging that this is preferable to allowing the pandemic to do its worst and to prolong the damage. Quick containment is key and health comes first and that’s the way it should be. So, at the time of writing, markets quickly scrambled to price in recession or are heading there fast. This is understandable and correct at least in the short term.

Within this correction process, volatility has understandably also reigned as investors struggle to deconstruct the full effect of the COVID-19 disruptive onslaught on the global economy. Malta is no different. The speed with which all is unfolding is indeed remarkable and Governments the world over have been quick to react and quite rightly too. Last week, US Treasury Secretary Steven Mnuchin indicated that the White House was looking at giving direct cash payments to Americans as part of a massive economic stimulus package of around $850 billion which it hopes could halt the economic free-fall caused by the virus. In Europe, following an emergency policy meeting also last week, ECB President Christine Lagarde commented that “extraordinary times require extraordinary action”. Doesn’t this remind us of Draghi’s reference to ‘we will do all it takes’ in 2012? Malta too has been relatively quick to react although as at the time of writing it remains to be seen how effective Government’s proposals will be judging by the initial reactions from the business community as represented by various associations and bodies. Indeed, it would seem that Malta’s initial response is far from what the economy requires.

However, despite the times being indeed extraordinary, we will return to normality. Sooner rather than later. In the meantime, though, we have to think of whether normality will be just like what we have been used to or something completely new. I think we need to quickly forget the relatively ‘easy’ recent past. We need to stop, think and appreciate that what we had and what we lived through is indeed the past at least for now. While remaining positive all along, it is imperative that we draw the line and now look to rebuilding step by step in a reasoned, prudent and risk-adjusted manner. In just a month, outlooks will need to re-adjust materially for most. Will companies be willing to continue to assume the same levels of risk as in the recent past? Will investors continue to assume and pretend that risk means very little?

I am convinced that the future remains bright. Markets will bounce back – some naturally much quicker than others. And some sectors quite understandably will perform much better than others. But isn’t this always the case? They did in 1987, 2003, 2009 and 2011 and they will do it again now. Naturally, the time to recovery was different in each circumstance. What is different this time some may ask?

One of many highly informative articles published online recently which I read contained a remark by Goldman Sachs in which it was opined that this is a health and confidence crisis and not a financial one. The argument is that unlike in 2008, banks worldwide are generally in much better shape now than they ever were with healthy balance sheets and strong capital and liquidity ratios. The article also mentions that economic fundaments generally remain sound and that most governments have announced aggressive and drastic support measures. This will help. Finally, the reality is that the same way the pandemic came, the passage of time and hopefully a medical breakthrough will help it subside. It is just a question of time. Advancements in healthcare globally over the years have been remarkable and the world has what it takes to stop this just as it also did in the past. Resources are plentiful.

You may think I am being overly optimistic. It is naturally impossible to judge the exact timing of recoveries as is always the case but evidence suggests that beyond the short term understandable emotional stresses all this has brought upon us, the world will overcome this. Inevitably, there will be some fallouts. Hard as it is to say so, some companies and sectors may not manage to survive the sudden complete halt to their revenue streams for too long unless a sufficient cash/liquidity buffer is in place. This is a stark reality that we cannot ignore but then again it is here that we need Governments the world over to understand that what can be done should be done as mass lay-offs will be the next to haunt.

In times of massive market volatility such as these, more often than not the best course of action for investors is to stay put. Ignore the noise, although it is indeed deafening at times! We just need to get comfortable with being uncomfortable. At least for the time being. It is impossible to time the temporary peaks and troughs especially as the market’s direction may not always follow what theory suggests. As long as one is adequately diversified, principally by sector, then the temporary hit should be relatively cushioned. So hang in tight. The worst may still haunt us but we will look back in a few years and wonder how we missed this opportunity of at least a decade (in some cases) to buy great companies at unbelievable (till only four weeks ago) prices.

Once again it is imperative for investors to understand that fundamentals will always prevail. How strong are the company’s major shareholders? How much does a company generate in cash earnings? How leveraged is its balance sheet? What is it principally composed of? Does it have access and room for further external financing to support short term liquidity crunches such as these?  While all are being hit and will continue to feel the blow for some time to come, it is these companies that will survive and bounce back first. This is precisely the reason why investors need to be very careful at all times and not underestimate risk. And regulators have a role here too, now more than ever!

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This article was produced by Edward Rizzo, Director at Rizzo Farrugia, which is a company licensed to undertake investment services in Malta by the MFSA under the Investment Services Act, Cap. 370 of the Laws of Malta and a member of the Malta Stock Exchange. The company’s registered address is at Airways House, Fourth Floor, High Street, Sliema SLM 1551, Malta.