As countries across the globe start to lift lock-downs and relax restrictions, there is the natural human impulse to do something to celebrate freedom, survival, hope and a future. Be careful!! As wealth managers many of our clients have asked us how best they can stay safe financially as the world threatens to return to a new normal…..
Firstly, my own opinion is that medically things are going to get a whole lot worse before they get better. Government management of the pandemic has been very, very poor nearly everywhere and I expect a large second wave of infections in UK, US and across much of Europe. In Uganda we are only now seeing the first spike and there may be more restrictions ahead. We are certainly NOT home and dry in terms of the pandemic itself.
What is inarguable is that the chaos of Corona is the catalyst for a worldwide recession which is actually overdue by some time. Clearly most businesses suffer in recession but not all do. In terms of the businesses that thrive and survive recession these have typically been in the following sectors:
- Food – the last thing that people do is stop eating so the farmers and the food retailers need not fear.
- Restaurants – people will still eat out if it is reasonably priced – in developed countries the cheap, fast-food restaurants like McDonalds do well in tough times.
- Healthcare – After feeding ourselves we will continue to spend money on making ourselves better when we feel sick.
- Transport – Goods still need transporting so freight companies have survived and prospered in many recessions.
- DIY/Hardware – People fix their houses. They don´t usually engage builders to do so but they still need the hardware and building supplies. DIY and hardware stores do well in recession.
Whilst the sectors above survive and thrive there are the very toughest of times ahead for businesses that:
- Sell motor vehicles – no-one buys a new car from a bond or dealer in recession.
- Furniture shops – You may repair the house but you will sit on the sofa till it collapses.
- Printers – businesses avoid all except the most essential printing jobs.
- Cement manufacturers – we repair in recession and not construct.
- Tourism – for many reasons this is likely to be the sector that is hardest hit for the longest time.
- Real Estate – as well as the reduction in prices there is a huge fall in volumes which does not help anyone.
If you are intending to start a business the sector guidance above may be helpful. But what if you are considering personal investment? I thought that it might be useful to put together a list of “do´s” and “don´ts” for our East African investors. Here goes…..
- Celebrate freedom by making any impulse purchases – you will regret it when you can´t drive it for another 8 weeks! Or re-decorate it because thebuilders can´t buy paint!
- Make any big decisions about investment inEast Africa until at least September – by which time you may not want to.
- Buy shares on US, UK or European exchanges – there is a big correction ahead.
- Hold wealth in UGX, KES, TZS or RWF– the Uganda Shilling is going to depreciate to at least 4100 against the USD before the end of 2021 and the others will follow a similar trajectory.
- Invest inrental property – however cheap it may appear, unless it is in a super-prime location.
- Hold off any investment decisions for the next few weeks inEast Africa – we are nowhere near the bottom of this market.
- Stay as liquid as you can because there will be some amazing opportunities for those who are able to take advantage of them – cash is always king and especially now.
- Move wealth outsideEast Africa if you can – all the tax authorities are going to be very, very aggressive over the coming years and assets will be far safer off-shore.
- Move yourwealth into US$ deposits and investments – as soon as possible.
- Be ready to act quickly for the simplest and best opportunities caused by the pandemic – there are already bargains and fortune favours the brave.
In terms of which asset classes to consider when it becomes safer to invest I think that over the next five years:
- Shares in the best companies operating in the worst industries are going to be very cheap – for example anything in travel and tourism that doesnot fail is going to be available at a very low cost post- market correction.
- Factoring or invoice discounting where you collect the cash that you lend a supplier directlyfrom their buyer is going to be hugely profitable as people scrabble for operating capital.
- Disruptive technologies – Iwrote last month about the opportunity to buy shares in a successful AI business at less than 12% of their current value.
- Property will be problematic – demand will be low, yields will be poor, management will be time-consuming, and assets will be very illiquid.
- Developer Finance – lending money to property developers in Europe has been very safe and very profitable: we donot see that continuing for anyone except the distressed assets specialists.
- Leveraged trading – whether Forex, Arbitrage or Commodities the level of uncertainty coupled with leveraged debt makes this far too risky a ride.
These are difficult times but as a wise man once said, “Within every adversity is the seed of a greater or equivalent benefit”. New fortunes will be made by those who keep calm and carry on – and those who learn lessons from previous recessions.
I hope you found this useful. Stay safe from the virus by doing all the things you know you should…….and stay safe from financial loss by asking us advice about anything at any time – we´re here to help through Covid-19 and the many years beyond. We make no charge for our opinion and we will always provide advice honestly and transparently. Ask anything at any time – [email protected]
Jon Pedley is Chief Operating Officer, Investment Owl. For more information contact Jon at: [email protected]