This is a financial horror story that is currently running only as an undercurrent to a tsunami of reports on rising death tolls and infection rates. Overwhelming government incompetence and inadequacy, coupled with rising graphs of deaths and hospital admission rates are dominating the news throughout a year when the real story should have been the impact of knee-jerk policy decisions on a world economy already in denial about its own unsustainability.
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However, as I write this the stock markets have soared in value, celebrations are taking place in boardrooms and offices around the world, and people are planning their 2021 vacations – a vaccine has been found. The utterly brilliant BioNTech, a German company formed by Turkish immigrants have developed a scientifically superb solution based on their cancer technology which teaches the body to spot a Covid-19 cell and attack it. It protects more than 90% of those exposed to the virus. We are saved. Alleluia!! Medically perhaps, financially, certainly not.
BioNTech were mocked many years ago when they started researching how to combat cancer strategically through cell education as opposed to using the harmful and dangerous scatter-gun approach that is chemo or radio therapy. Their cancer treatment worked and made the husband and wife team who own it billionaires. The Covid-19 solution will make them multi-billionaires. Unhappily, unlike the medics at BioNTech who adopted a focused, controlled and scientific approach to adapting their technology to combat Covid-19 the leaders of the world’s economies have used the financial equivalent of the most virulent form of chemotherapy to try and correct the financial cancer caused by the pandemic.
The numbers are nothing short of horrible:
- ECB financed a €1.35tn debt purchase – with more to come.
- Debt to GDP ratio in developed countries – 140%.
- Number of people newly in extreme poverty (less than $1.90 a day) – 100 million.
- UK borrowing to fund Covid-19 related relief and support – £500bn.
- Cost of Covid-19 to Americans – $16tn.
Our leaders chose, rightly or wrongly, to savagely close down economies and then, where possible, to generously fund the losses that those shutdowns incurred. Tax receipts fell massively and government spending rose exponentially – that is an equation that no economist can make work without dramatically raising taxes when the pandemic itself is deemed to be under control – which I estimate will be March 2021.
Many governments will then halt the support they have been giving to banks, businesses, employees and individuals and it is then that the “blood will be on the streets” for many people. Many businesses will cease trading, unemployment will increase dramatically, taxes will rise and inflation will increase. Q1 and Q2 of 2021 will be the hardest of times for many years – and probably the worst of most of our lifetimes. It is estimated that it will take between five and ten years for economies in some countries to recover to a pre-Covid-19 level.
Thereafter the economic measures necessary for the ministry of finance in any developed country to recover the deficits will start to impact the spending public in any of those countries. In summary I expect 2021 to be a lot worse financially for nearly everybody except those industries that were completely decimated by Covid-19 such as tourism and education.
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So that is the very bad news – are there any good tidings? Perhaps! Firstly, it is generally accepted that the emerging economies will emerge first from the economic carnage of Covid-19. The systemic shocks delivered by the pandemic to a nation´s financial health rate highest in the most developed financial infrastructures. And there are certainly opportunities. Indeed in the hardest of times the rich get richer and they do so by following these broad principles:
- Buy shares in undervalued businesses: the share price of good businesses will be impacted by global recession – that is how the market works. There are stocks around now that are at least 30% below their value and they will go lower.
- Buy precious metals: gold and silver (particularly silver which still has a way to go in value terms) look like a great place of safety.
- Sell only essentials: invest in or start businesses that sell the things that people have to buy – luxuries, leisure travel and impulse purchases do not continue during recession. Food is always an essential purchase.
- Buy real-estate: but only if it is heavily stressed or distressed and if you can afford to hold it for five years.
- Pay down bad debt: anything expensive needs to be paid off.
- Borrow cheap money: recession is a great time to expand a business using other people´s cheap money.
- Stay close to home: the richest investors make great investments outside their own national economies – but not in times of financial stress. In this time of global uncertainty if you don´t have feet on the ground and personal experience of a country then stay away.
So if the emerging economies of East Africa are going to be among the first to recover, essential items are the things to be producing or retailing, and investment close to home is the safest option. For those who want to maximise the opportunity then my favourite investment opportunities are going to be food and agriculture based. My absolute ideal would be an existing indoor farming business (fruits or flowers) that is stressed or distressed which I would seek to purchase at below market value, trade locally at some profit for the first two or three years, and then convert into a specialist export business in a high value crop such as medical marijuana. Here´s hoping!!!
Jon Pedley is Chief Operating Officer, Investment Owl.
For more information on this or anything financial contact jon@investmentowl.com
