Reflections on the COVID-19 Crisis From a Long-Time EM Investor
It’s hard to believe that, as I approach my 50th year, more than half of my life has been focused on analyzing emerging markets. My first real market panic was the Mexican Peso/Tequila crisis, which seemed about as bad as anything I could imagine. But the crises only got bigger over time: The Asian Financial Crisis, LTCM, the 1998 Russian Collapse, Argentina’s blowups, the tech bubble and bust, September 11, the European debt problems, and the Global Financial Crisis (GFC). As I think back on the crises of the past, I’d like to offer some thoughts on the current situation. Please note that my comments are not intended to offer any short-term advice.
First, the worst thing to do in a panic is, well, panic. Demanding liquidity in a time where liquidity is at a massive premium is rarely a good idea. The world is full of resilient leaders, clever policy makers, driven innovators, and hardworking people. We have overcome depressions, defeated communism and fascism, and made progress against the wretchedness of war (both real and Cold). It is likely that the COVID-19 pandemic will be transitory, but its depth and duration are clearly hard to predict. Some marginal or levered players will be squeezed, so try to avoid running through the same exit doors that they are forced into.
Second, be careful of your numbers. Many investors rely on various measures of historical, contemporaneous, and forward-looking data to assess company fundamentals and risk. In these types of crises, the information flow is blocked. Company managers are unable to update guidance, analysts then find it difficult to make predictions, and few will take solace in 2019 figures.
Sell-side analysts are some of the hardest-working people I know, but the speed of the movement of a crisis like this limits the ability to forecast. To illustrate the point, Figure 1 shows the breakdown of sell-side analyst revisions over the last two months. Over 50% of the estimates haven’t changed. And almost 20% of the revisions were positive for earnings-per-share improvement in the year ahead. This is clearly inertia. Still, I sympathize with the analysts’ challenge – I used to be one of them.
Third: Don’t try to be a hero. Trying to catch the bottom is a mug’s game. There will be a massive policy response to this crisis, focused both on the economic and public health dimensions. We can witness what is happening in China to gauge what will happen elsewhere, but this type of analysis is not physics. The differences between a single-country crisis and full blown global pandemic should be clear by now to all. In my opinion, the market will find a bottom when at least a few of the following boxes are ticked: coordinated global policy response, positive news on vaccine development and/or treatment, stabilization of the virus growth rate globally, and the ability of authorities to manage any large-scale credit events (which are almost certainly in the offing). I tip my hat to anyone who can predict the date these events will happen.
Finally, I would argue that investors should stick with their discipline. Rebalance your portfolios as needed, keep an eye on transaction costs, and take advantage (slowly, carefully) of any market dislocations. Corporate governance always matters, but especially in times of stress. Good companies that deliver value for customers and shareholders make for good long-term investments.
There may be difficult days ahead, but this too shall pass.
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