Stephen Clapham in his blog behindthebalancesheet.com has come up with ten reasons why the investment landscape in the western world will be different in post-Covid19 virus world. His points are worth pondering over by all investors. This article contains reasons number 6-10.

6. WHERE NOW FOR INCOME FUNDS? For many companies, the priority will be rebuilding balance sheets. Dividends will be a secondary issue. For those companies subject to Government rescue, dividends are likely to be capped or forbidden until debts are repaid. Income fund managers will have an increasingly narrow repertoire. A corollary may be that some perennial dividend payers may be rerated as these funds are forced into a narrower group of stocks.
7. FINANCIAL REPRESSION & CAPITAL CONTROLS One clear effect of the pandemic is that almost every government on the planet will have a lot more debt than they did in January. And the situation in January was not looking particularly attractive. My guess is that Governments will at some point feel constrained in what they can spend and they will seek to reduce their debt burdens. Most will surely be forced to (continue to) engage in a policy of financial repression so that their interest rates are below inflation. The best way of reducing debt to GDP is higher growth – timely fiscal stimulus should be a priority for all Governments, and correctly delivered, gets us all out of a mess.

8 BALANCE SHEET RESTORATION Personal and corporate balance sheets need to be restored. This is likely to weigh on economic growth for a number of years. Companies will likely rein in capex for the 2020-2022 period. Consumers will buy fewer and cheaper big-ticket items. This seems inevitable, although the impact is hard to model on corporate earnings at this point – we do know, however, that earnings will be lower than formerly forecast. The one slightly odd exception to the big-ticket expense may be the leisure sector where there will be a massive pent-up demand for holidays.

9. RIPPLE EFFECTS AND INFLATION The coronavirus crisis has created huge, survivability issues for a limited number of sectors, notably airlines, travel and hospitality. The duration may be variable. These have been fairly obvious and direct impacts. What we have yet to understand is the indirect impacts beyond the general economic decline. My candidate for the most impactful would be an increased propensity to save which would slow economic growth.
10. The Great Reset: In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the embezzlement increases rapidly. In depression, all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. Now finance chiefs have an opportunity, presented by the virus, to engage in the Great Reset – earnings will be reset, the virus will be the excuse. Even if there were no lasting effects from the virus, earnings for the vast majority of quoted companies would be reset down. They have been stretching the elastic of earnings for some years and now they have the opportunity to get their books in order. Forecasts will go down, even before you factor in the virus effects.

Stephen Clapham in his blog behindthebalancesheet.com has come up with ten reasons why the investment landscape in the western world will be different in post-Covid19 virus world. His points are worth pondering over by all investors.

1 Fortress balance sheets: One legacy of the pandemic may be a culture of greater conservatism and risk aversion. Boards are likely to adopt a more conservative approach – the shock we have just experienced will make even the less risk-averse Director appreciate having more cash and more facilities, just in case. Boards will likely want some security against another pandemic.

2   Onshoring supply chains: Businesses are likely to shift to from lean ‘just in time’ to bigger ‘just in case’ inventories. Businesses will be warier of single sources of supply or demand, allowing for a greater ability to switch activities or locations. Clearly there is an associated cost. The risk inherent in just-in-time and diverse supply chains has become more apparent and companies will surely want higher stocks, more diversity of supply and will onshore more production as a protection against a recurrence. Again this will have two implications: Production costs will rise and Returns will fall as inventory and working capital increase.

3 Working capital unwind: Unwinding of working capital will occur on both sides of the balance sheet. A number of industrial companies which have improved working capital tremendously over the last 10-15 years. But many have done this predominantly by failing to pay suppliers on time – unless their supply chains are extraordinarily robust, these companies will be hit by the need for increased inventory (see 2 above) and by the need to start paying suppliers more quickly.

4  Interest rates may stay low for some time: It seems highly likely that interest rates will stay low for an extended period. Clapham’s base case assumption is that as with the situation post the GFC, inflation will remain subdued (this may well be the surprise of the decade as inflation returns as in the mid-1960s, but not for a while). This should, in theory, continue to fuel the valuation of growth stocks. With growth scarcer, this becomes an even more attractive feature.

5 Pension deficits to increase significantly: Assets have gone down significantly for those with higher exposure to equity, less so for those funds with a larger exposure to bonds and. And funds with heavy exposure to alternatives may find that the lack of a mark to market doesn’t help if the private equity portfolio companies sink under the weight of their dent. Liabilities have gone up significantly because the liabilities are discounted to present value based on bond yields which have collapsed. This means that pension deficits will have increased significantly for most quoted companies. This is almost a straight subtraction from equity values.

We will continue with the remaining five on Sunday 3^rd May.