COVID 19, Crisis or Opportunity?

First and foremost, I think we need to understand that no one can ever predict the
market. Everyone is but giving their own analysis and opinion of the current situation and it
is ultimately the ownness of the investor to decide the subsequent action. The Covid-19
crisis has been unprecedented in many ways, and as with such uncertainty will always come
varying solutions across countries and governments. But the common factors are prevalent,
immediate economic standstill with mass unemployment, and massive fiscal stimulus to
combat it. Henceforth to make an informed decision, we must understand the current
market situation.
After plunging 30% to 40% in March (5 out of 10 of the largest one-day point drops
for the Dow Jones Index (DJI) in history were recorded), it has since rallied up and major
indices are down only 10 to 20% YTD. This happened on a backdrop on poor economic
news. US unemployment rate has skyrocketed, with roughly 20 million Americans losing
their jobs in April bringing it to an uncomfortable 14.7% (An underestimate, given that the
Bureau of Labour Statistics, BLS, admitted that the rate is closer to 20% with the difference
accounted to its methodology of obtaining data) worst since the great depression where it
was 24.9% at the peak. GDP followed suit, with US posting a 4.8% contraction for Q1 2020
and with Goldman Sachs posting a prediction of 24% for Q2. These statistics were mirrored
in other countries as well, UK 10% unemployment 25% GDP contraction, even in Singapore
with a relatively regulated and stable job market, predicted 3.5% unemployment (compared
to 3.3% during the 08 crisis) and 10.6 GDP contraction. The economy has generally been
bleak globally.
This presents the question, is this a good time to enter the market? Is the peak
recession already past? Or if you are already an investor, should I cut my losses and wait for
a better time to re-enter? How can I proceed and alter my portfolio from here? For this we
will delve into the Bull and Bear cases for the economy.

The Bear Case

It is first important to understand what a bear market is. Generally, it refers to one
that is in decline and will continue to do so. Supply for securities outweighs the demand,
sentiment is negative, and the economy is weak as businesses lose profits and continue to
lay off their workers to cut costs leading to a drop-in price for securities.
With that said, let’s look at the current outlook for the disease. As we approach mid
may, a lot of countries around the world are starting to see a plateau of cases with low
community spread and henceforth decided to gradually ease lockdown measures and open
up the economy. Even in the US, where the cases are not significantly down from its peak
(Fig 1), the economy is reopening under the Trump administration.
 Under normal
circumstances this would be a
good thing, increasing
employment, injecting cash into
the system and generally
increasing the pruchasing power
and consumption of the public.
However this also increases the
risk of a secondary wave of
infections (which would coincide
with the trend observed for the
Figure 1: Cases in US by CDC
1918 Spanish Flu pandemic)
after all there is no proven
vaccine for the virus. Germany, for example, watched as the virus reproduction rate increased to 1.1
from 0.65 just days after its reopening of the economy (<1 is understood to be the rate at which the
virus is under control). Even Asian economies which have successfully brought under control the first
wave of the virus like South Korea and Japan have also seen spikes when reopening, with clusters in
Night entertainment places one of the hotspots. Furthermore, the problem could be exaccerbated if
countries fail to implement widespread testing within the nation. Given the asymptomatic nature of
the virus, widespread testing is crucial to identify and sieve out potential transmitters of the disease
before they unknowingly spread it to others causing a greater outbreak. Not to mention a complete
disregard to social safe distancing measures in many western countries with demonstrations and
protests calling for the economy to reopen. A mixture of incompetence from the government,
uncoorportive public and a pure physical strain on the healthcare system might just be a perfect
storm brewing.

If the first wave was bad enough, a second wave could be more disasterous for the economy
for a few reasons.

1. The virus could mutate and evolve into a deadlier, more contagious strain, leading to more
deaths and greater number of people being infected. This was the case in the 1918 Spanish
Flu pandemic
2. The resurgance would put an unimaginable strain on the healthcare system of the countries
with resources already depleted from the first wave, leading to inadequacies and more
fatalities
3. Coinciding with the seasonal flu might be a major concern as well. Usually from October to
May, the Flu kills 29000-59000 anually in the US alone. Placing greater stress on a depleted
system.

This would mean a longer period of lockdown, and small and medium enterprises who were barely
able to begin starting up again would have to close and another cycle of unemployment would start.
Loans and mortgages would have to be defaulted due to the people’s inability to pay them without
income, banks and financial institutions would be faced with a mountain of illiquid assets and debt
from defaulting loans and throw the financial sector into uncertainty. Investor confidence will be lost
and a greater sell-off will be in place, causing another crash in prices.

However lets be a little more optimistic, given that there will be no second wave, many
experts still think that the market might still be headed into a downturn. No one knows for sure how
long it will take before the economy is fully back on track, and many will be reserved and concerned
as to whether to head back to work. The expectation that everything will quickly return back to
normal and jobs will be back quickly is unrealistic. Just look at China, who is arguably ahead of the
curve being the original epicentre of the virus. Business owners are already reporting that consumer
behaviour has been largely altered, people are more reserved and reluctant to travel because of the
uncertainty that they could be infected from other places. Furthermore, businessess would have to
adapt and improvise their business model to incorporate the new “norm” of the eonomy to be able
to really optimise their enterprise and return back to normalcy. If the economy does not live up to
the investors expectations, the current positive sentiment could easily sour and the market might
just crash again.

Further more, if all this is still unonvincing, the legendary investor Warren Buffet who is
often an advocate for buying in global economic downwturns, has refused to play his hand in the
current market stating that he does not see any great opportunities as of yet. The “buffet indicator”
(dividing the total vaue of publicly tradeed stocks by quarterly GDP), one that he termed “probably
the best single measure of where valuations stand at any given moment” and said is “a very strong
warning signal” is at 179%. Compared to 118% just before the dot-com bubble burst in 2000.

Although us retail investors are different from industry value investors, if one of the most
successful firms and investors, Bershire Hathaway (US707.8bn AUM), is reserved in the market, I
think that should serve as somewhat of the canary in a gold mine and a warning that maybe the
crash isn’t over yet.

The Bull Case

In contrast, a bull market is one that is in an upward trend, with positive sentiment and a
growing economy. There is greater demand for securities and hence prices rise.

It is important to note that the market does not always accurately reflects the economic
situation now, but instead it reflects investors’ confidence on the situation at hand. Luckily for us,
there is mounting evidence that the despite the dire outlook now, conditions are starting to
improve. The momentum of the economy and level of activity in the market are two similar yet very
different things. So, while the unemployment rate and economic activity remains at an all time low,
the momentum seems to be shifting for the better. In the US motor Gasoline, mortgage purchase
applications have bottomed out during the week ending April 10 th, recouping 33% and 40% of its
plunge while passenger screenings are now double the April 14 th low, but still 93% off its year-ago
level. Similarly, although earnings are set to plunge up to 41% for Q2 2020, major analysts like those
at JP Morgan a projecting a rise of 13% as early as the first quarter of 2021 and project to hit
previous highs by the first half of 2021.

Furthermore, we have seen an unprecedented amount of quantitative easing worldwide,

coupled with lowering interest rates, countries globally have made it very clear that it was willing to
step in to buoy the economy in these uncertain times. Quantitative easing refers to the introduction
of new money supply by a central bank, often through buying of bonds and other financial assets to
inject money into the economy, as well as providing companies with the liquidity needed to upkeep
debts, settle contracts and rectify leveraged positions to sustain the economy. As of April 29, the
Centre for Strategic and International Studies estimate that the G20 countries are providing US$6.3
trillion in fiscal support or about 9.3% of the 2019 G20 GDP compared to 2.5% of G20 GDP during the
08 crisis. The decision was also made and implemented far quicker than it was during the 08 crisis,
possibly providing more stability to the SME’s and garnered greater confidence amongst investors,
believing that the stimulus would be enough to tide companies over these challenging times. This
leads optimistic investors to accentuates the bets banking on a “V” shaped recovery, leading to a
sustained rally in the market.

The increase in buying securities could also be due to the near 0 and possibly sub 0 interest
rates central banks are imposing, leading people lose money in real terms if it is left in deposits as
inflation outweighs the interest accrued.
Hence a lot of retail investors are forced
to move their money into the equity or
managed funds market to secure a
reasonable rate of return for their cash,
some even living on the interest paid to
get by.

Bullish investors would also take

comfort in trends for the past epidemics
(Fig. 2) with the market generally showing
significant recovery after a 6-month
period consistently. While past
Figure 2: Market returns for past epidemics
performance is never a reliable indicator
for future performances in the market,
this could prove a speculative indicator for the recovery to come for Covid-19.

Analysis

A pandemic of this scale has not hit us since the Spanish Flu of 1918 and at that point in time
Scientist have yet to figure out that the flu was caused by viruses, hence there is really no experience
to reliably and accurately compare the current situation with. However, having analysed both sides
of the coin, I would still maintain that the situation leans towards a bearish market going forward in
the short-medium term and the worst has yet to come. For a few reasons.

1. The cases have yet to stabilise and plateau on a global scale, while some regions and
countries might have successfully
flattened the curve, others are
just beginning to reach the peak,
contributing to an almost linear
rise in cases (Fig 3.) This results in
an omnipresent threat of
reinfection from imported cases
as economies reopen given its
asymptomatic nature. This will
cause disruption and delays to the
resuming of economic activity,
with significant barriers and Figure 3: Covid Cases globally
restrictions still to persist, feeding
uncertainty and speculation
amongst investors and ultimately a loss of confidence.
 2. Markets are way overpriced and in a bubble. Describing the gap between the market and
the current economic situation as a chasm will be an understatement, valuation of
companies is just way over actual earnings. The recent rally is exhibiting many characteristics
of a bear market rally and these are common during steep market corrections. Investors
feeding off positive sentiment, pricing in government stimulus and a fear of missing out on a
potential bull market are driving stock prices up, but when economies reopen and reality
hits that the economy will not see an immediate gain back to original flourishment,
confidence will run out and so will the bull. In my opinion, equities are due to fall at 20%
from the highs of this dead cat bounce. Leading on to my next point.
3. Consumer patterns will not be the same. Given the scale and impact of the virus on our lives,
forcing most into compulsory lockdown, taking away jobs and income, people will emerge a
lot more wary and conservative then they were at the end of a 12-year bull run. This is
shown in China where in the wake of reopening the economy, its Producer Price Index has
fallen 3.1% (Sharpest in 4-years), while it has seen food prices soar 20% due to damaged
supply chains. Fear of a second wave and the inability to provide for themselves with
increase needs spending would take a toll on spending for non-compulsory items, especially
for the lower to middle class where most domestic consumption is concentrated. The
immediate recovery will be thwarted, and recovery will be slow at best.

However, this is but an analysis of the issue at hand. The market could ignore the economy
buoyed by government spending and optimism and many experts are still split on the issue. This just
goes to show the uncertainty and unpredictability of the current situation. The Volatility Index (VIX)
is down from the high of close to 70, hovering around the 30 mark of “elevated volatility” and
markets have been relatively quiet in the past weeks, indicating a possible big movement coming up.
Apart from Covid-19, many situations also feed the uncertainty in the market, given the US
presidential elections are at the year’s end, the ongoing US-China tension with growing distrust
between the two superpowers, Brexit woes and middle-east tensions unresolved, volatility and
uncertainty are here to stay.

So how can you invest in the current situation? Like all things when uncertain, always fall back to
the basics and look at the longer horizon.

If you are a new investor in the market, be more conservative and go for lower risk options. You
could always invest in Unit trusts, Exchange Traded Funds (ETF’s) rather than plunging straight into
equities. They come with the perks of diversification and being professionally managed, preventing
you from needing to splurge large amounts of capital purchasing different types of equities. Of
course, you will still need to do your due diligence on the fund and what they are investing in, what
type of fund it is, the history of the fund manager and its respective fund performance history. Make
sure that its goals and objectives align with yours before investing in it. (Funds can be income
focused, giving a dividend per unit time, or capital appreciation focused, increase in value of the
units, and you need to choose which one best aligns with what you want)

I would discourage a new investor to experiment in equities in such a volatile market. However,
if you wish to do so, you should pick equities that have the capacity and liquidity to sustain the
current crisis (Large firms and established names like Apple, Alphabet, DBS). Research is paramount
in equities, after all you are buying a share of the company. Scrutinise balance sheets and market
share, read up on company reports and look toward long-term trends and sectors that you believe
will prosper in the future (AI, tech, alternative energy etc.).
 Most importantly, do not try to time the market. Everybody is always “buy low sell high” and
trying to catch the bottom of the market. But this is akin to catching a falling knife and could result in
huge losses, remember time in the market is always better than timing the market. If you believe in a

Figure 4 Dollar Cost Averaging

company or a fund, a golden way to navigate uncertainty is to Dollar Cost Average (Fig 4.) This
means periodically investing the same amount of money through highs and lows, resulting in an
lower averaged cost price per unit.

With this you can safely start your investing account and prepare yourself for a financially
independent future.

If you are already an investor in the market, this could be a great opportunity for you as well.
The volatility in the market could allow you to maximise your portfolio, trimming positions on
overvalued shares to free up liquidity. The increased cash can then be used to average down your
long-term positions in favourable companies or to look for new positions in undervalued companies
to further diversify your portfolio. Be disciplined and don’t panic, the greatest opportunities often lie
in chaos and unpredictability. Be sound in judgement and fundamentals, and over time the
investment would pay off. For example, many large, cash-rich corporations will use this time to
purchase smaller struggling competitors, increasing market share and improving their company.

In conclusion, investing is like whisky, it just gets better and more expensive with age. As
Warren Buffet said, “Our favourite holding period is forever”. Though the short and medium term
might be unpredictable and unstable, with due care and diligence the long term will be positive.
Have discipline and a little faith, and I will see you on the other side, in green and in profits,
hopefully sooner rather than later.

Written: 12th May 2020

Keefe Lim

*Disclaimer: Investing should only be done with excess capital and when you can spare the cash to
do so. Always make sure that needs are taken care of first and do not overestimate your ability to
participate. Overzealous investment might result in having to prematurely liquidate assets and
therefore suffer losses.