Schroders latest update to Climate Progress Dashboard suggests the current pace of change will result in temperatures rising by 3.9°C above pre-industrial levels.
Read Climate Progress Dashboard forecasts global warming of 3.9 degrees despite covid-19 crisis here.
Bridgewater Associates, the world’s largest hedge fund, has identified a $27 trillion hole in global corporate income from the outbreak of the pandemic.
Co-chief investment officer Bob Prince said the hedge fund had built programs that run macroeconomic conditions through company income statements and balance sheets that identified the global shortfall in income as well as the winners and losers from the downturn. He was speaking at Investment Magazine’s Fiduciary Investors Digital Symposium from his home in Connecticut.
“To then translate that into equities and to bonds is going to be very important,” Prince told delegates. “That hole in income is going to be filled unevenly. Some companies and some countries will feel the impact much more; some governments will be able to deal with it better than others. There is a massive differentiation inside the system.”
Prince warned of a duration mismatch between the time frame of when the pandemic may be brought under control and the “staying power” of company balance sheets and fiscal support from governments. According to the co-CIO, it is estimated that between 60 to 70 per cent of the population will need to have developed an immunity to COVID-19 either through a vaccine or by having caught it.
“That takes time,” he said. “We are roughly looking at an 18 to a 24-month timeframe for that virus to play out. If you think about an 18 to 24-month timeframe for a collapse in income, how long can governments offset that and how can they do that effectively? That will be a key question.”
He also cited countervailing forces in the financial system between falling cash flows – as a result of the collapse in income – and the abundance of liquidity coming from government measures to stave off a severe economic downturn. Fiscal policy, while replacing lost income, was not replacing the drop in spending.
Prince estimates that for every dollar that policymakers inject into the system, just 50 cents was being spent with the rest used for debt reduction.
“It means you really need to see $2 of fiscal to get $1 to replace $1 of spending,” he said.
As for monetary policy, Prince noted that of the $6 trillion that the US Federal Reserve was printing as part of its latest round of quantitative easing measures, $2 trillion supported the government’s fiscal policies with the rest underpinning financial markets. He said economic recovery would likely come in two stages – an initial “pop” as social distancing measures are reduced, and then a “slow grind” upwards as the unemployment rate slowly normalised from levels not seen since the great depression.
And because of the increased indebtedness of countries going into the pandemic, Prince said that the growth rate would be not too dissimilar to the period between 2000 and 2008 which saw a gradual decline in the US jobless rate at around half a per cent a year. By way of comparison, the US jobless rate soared to 14.7 per cent last month and during the peak of the global financial crisis, was between 8 to 10 per cent.
“So much depends on what happens with the virus and what happens with medicine,” he told delegates. “It will be literally the trade-offs that society makes between mortality and the economy. Massive amounts of uncertainty mean you really can’t make any predictions with any confidence.”
As for investing in the stock market, Prince said there would be a “massive differentiation between industries and companies.” He added that a 10 per cent unemployment rate could cause a decline in company earnings anywhere between 90 to 10 per cent.
“Differentiation is a key thing to focus on,” he said. “This adverse level of economic activity … will squeeze some things up, because they benefit from liquidity, and it will squeeze some things down because they will be hurt by the cash flow. The biggest opportunities will be in those differentiations.”
The hedge fund manager also reiterated his positive stance on the Asia bloc – a group of eight countries that actively trade with one another and China – and roughly contribute to global growth about two and half times that of the US and Europe. He noted that the pandemic had only reinforced the divide that already existed between the two trading blocs, which created opportunities to further diversify portfolios.
Prince also said that unlike the US or Europe, Asia still had more levers at their disposal to manage its economy with interest rates not yet at zero and with more room to do QE. He added that an independent monetary credit system was driving Asia’s economic engine from China.
Elsewhere, the hedge fund manager said his team is focusing on companies with long duration cash flows. He named Microsoft as one example of a firm with little debt, fat profit margins and a strong balance sheet with the “ability to absorb the collapse of income for a period of time.”
“If you have a long stream of cash flow you can more reliably look to what is the valuation of this asset with a five, 10, 20-year time frame because they can last that long and leapfrog over this environment,” he said.
Investment Magazine is the sister publication of conexust1f.flywheelstaging.com, both are published by Conexus Financial.
In this quarter’s infographic Schroder’s focus on what Covid-19 means for climate change and the impact of the pandemic on the food industry.
The Future of the Corporation programme is the British Academy’s review of the role of business in society. It combines research from a range of academic disciplines with insight from senior business and policy leaders.
A wide range of academic institutions are embarking on research from 2017 to consider the future of business from different angles. This publication aims to be a contribution to that effort, incorporating the voice of leaders of business in the project from the outset.
The Voice of Business captures the views of 16 leaders in business, drawn from in-depth interviews covering the broad topic areas of the project as a whole. Most specifically, it covers:
While these are not new areas for consideration, the intention in this publication is to understand the perspectives of people who experience these questions in action. As the research which will make up the Future of the Corporation gets underway, the intention is to ensure that that work is set in the context of how business leaders see the role of business in the world, and the pressures and opportunities that presents.
As the Future of the Corporation programme unfolds our aspiration is to engage a wide range of stakeholders in fresh thinking about the future of corporations, including government, policy-makers, regulators, economic and social commentators, and business itself.
Read The Voice of Business, published by The British Academy as part of the Future of the Corporation Research Programme.
Campbell Harvey, Professor of Finance at Duke University, is optimistic there will be a vaccine developed in the fourth quarter of this year, a period where he also predicts a return to economic growth. However inflation is his biggest fear, he told the CFA Institute virtual conference.
Harvey, who in his PhD showed that inverted yield curves predict recessions, has been studying recessions for some years. This one, he says, is different. The biological cause of the crisis means there is a light at the end of the tunnel.
“The official unemployment of 14.7 per cent is vastly under-stated it’s probably more like 30 per cent. That number might be higher than the great depression, but that doesn’t mean we are in a great depression,” he said. “The certainty is different, there is an end we can see, and attitudes are different.”
Harvey has actually coined the phrase the “Great Compression” due to the equivalent job losses of the great depression being compressed into a few week.
He predicted that the second quarter in terms of economic growth will be “off the chart” with something like -30 per cent on an annualised basis. But he predicted by the fourth quarter things will start to pick up.
“We will see significant growth in the fourth quarter in terms of my forecast. I believe a vaccine will be developed in the fourth quarter and deployed in the first quarter of 2021.”
But while Harvey was upbeat about the light at the end of the tunnel, he was also cautious about the potential long-term damage to the economy.
“What we don’t want is structural damage to the economy, where high quality companies that were profitable and innovating go down because of this natural disaster. If they do, that will delay the recovery that will basically haircut future economic growth. A lot of policy response has been focused on mitigating these structural issues so high-quality companies can be in stasis during this crisis and then re-emerge,” he said.
“What I worry about is that there will be confusion, and this policy will not be successful and we’ll lose many of these businesses. And we’re not just talking about a handful of big banks you can call up and put in a room like the GFC, it’s 30 million small and medium companies.”
Harvey also expressed concern about how to pay for the crisis, concluding that raising taxes was an unlikely political response.
“We have to pay for this. This is not a regular natural disaster like a hurricane hits a state and the rest of the country ok. This hits everywhere and we are borrowing and have to pay it back,” he said.
While the economy did not see inflation after the GFC, Harvey said it doesn’t mean it won’t happen this time.
“I’m hesitant to extrapolate from a sample of one, It’s a significant risk. It’s something that impacts companies negatively, and people negatively, including the people who can least afford it. I believe inflation is the major risk.”
Professor Harvey’s presentation is available on YouTube.
Toggling between aggressive and defensive allocations is the ‘greatest single thing an investor can do’, if they can do it appropriately, according to Howard Marks, whose own allocations have become more aggressive.
“To be a good investor you have to have confidence. You have to have views and put them into action,” the co-founder of Oaktree Capital said during an interview as part of the CFA Institute virtual conference.
But while confidence plays an important part in investing, Marks also said there is no clear line of delineation for when confidence becomes hubris and stubbornness. So, he concluded, it is important for investors to build in a margin of safety in investing, and that can come from many different places such as the quality of the company, the predictability or stability of the industry, the firmness of the documentation around the investment, or the lowness of the price.
“Investors should calibrate the confidence in the investment by how much margin of safety there is,” he said. “At Oaktree we become more aggressive when we believe there is a greater margin of safety – which is largely from the discount of price from the intrinsic value. When we start seeing things sell well below their intrinsic value that’s when we turn aggressive. I’d say we are a cautious company, we are in risk asset classes, but are cautious. But when we go through these crisis and prices collapse relative to long-term intrinsic value we throw off our caution and become incredibly aggressive.”
Marks said the distressed debt world does reach extremes periodically and his team has learned, and profited, from the cycles it has already lived through.
Being contrarian, he said, means by definition outperformance is to think and behave differently from others.
“You have to be more right than others are, and that has to come from correct idiosyncratic decisions. To do so you have to depart from the crowd, that’s the importance of contrarianism.”
The CIO fo the Yale endowment, David Swenson, has said that active investment management requires the adoption of “uncomfortably idionsyncratic” portfolios.
“They are two beautiful words – comfortably idiosyncratic,” Marks said. “In our industry being too far ahead of your time is indistinguishable from being wrong and that’s where the discomfort comes from.”
While Marks believes that paying attention to where a market is in a cycle is the best indicator of what is coming next, the market today is not part of a normal cyclical occurrence.
“We have had an outside influence to which I have argued the markets have been vulnerable for some time. But it finally arrives in the first quarter of 2020, and knocked the market for a loop. But this was complicated by the fact in order to combat the virus we put the economy into a deep freeze and again Treasury is supporting the economy in unprecedented ways,” he said. “This will play out over the next several quarters, if not years.”