World economies hammered but there are a few bright spots

By Adam Pankratz

The Covid-19 tidal wave roared in and flattened the world economy, laying waste to businesses and government plans around the globe. The wave has now ebbed, but does a second wave and further rough water lie ahead for investors?

The numbers relating to Covid-19 and its economic destruction are staggering by any measure. No country was spared, no industry unscathed. Canada’s GDP shrank by 9% in March, in France the economy contracted by 5% in the first quarter. The most recent data out of the UK shows that their economy contracted by over 20% in the month of April – an absolute cataclysm. Looking more broadly, the IMF estimates that rich world budget deficits will average 11% of GDP in 2020, with government debt climbing from 105% of GDP to 120%.

Unemployment has skyrocketed around the world – over 30 million in the US – and in one of the more astonishing trading days the price of oil sank to -$37 a barrel. And no, the negative symbol is not a typo.

Any observer seeing the aforementioned figures would be forgiven for assuming that the world was on the brink of collapse, with the stock market at all-time lows as investors fled for any safe haven possible, even if that meant stuffing money in their mattress. Markets, however, remain stubbornly resilient. Since the low water mark towards the end of March, stock indices have recovered (up 38% from March lows), even if they have not it the lofty highs of February. Is this a sign that the world is rebuilding from the Covid-19 devastation, or is it unjustifiable optimism by people who have simply had enough and are letting wishful thinking override clear-eyed analysis.

One of the answers may, surprisingly, lie in the fallout from the recent protest waves sweeping the US and many other countries. If the message of the protests can be admired, the social distancing practiced cannot. Health leaders long warned of the mass gatherings – so called “super spreader” situations – as the worst-case scenario for Covid-19 outbreaks were spreading. If the following weeks do not see a significant spike in Covid-19 cases, does it not seem likely many people will decide for themselves that the pandemic is over? Politically, it would be very difficult to justify the strict measures currently in place if a gathering of thousands does not result in disaster. That could be good news for the economy as citizens decide to resume their pre-Covid-19 routines.

Unfortunately, that scenario seems unlikely. Data does not indicate we have fully slayed the Covid-beast and it is becoming increasingly difficult to ignore the shuttered shop windows and empty restaurants that have now become part of our everyday lives. Logic and common sense say tough economic times lie ahead with flat or minimal growth in many areas.

Stocks will react differently depending on their industry. Energy and base-materials will likely continue to struggle. Good deals are to be found by choosy investors here. Retail will continue to get pummeled, except for the online giants who are having a field day. Classic safe havens like gold and precious metals and related equities are likely to remain buoyant, as I mentioned in a past column. And, in an interesting twist for longer-term, risk averse investor, Covid-19 gave the answer to the always theoretical question of where they would want their money in a global Armageddon. Now that we’ve seen theory in practise, buy those companies.

One interesting area to keep an eye on are banks and financial institutions. While bank fundamentals remain strong – particularly in Canada – their clients are in trouble. The regulation resulting from the 2008 crash has thankfully made the financial system resilient. However, one of the key differences between the Covid-19 crash and 2008 is that 2008 was caused by the financial system, where 2020 is a global economic shutdown across the board. So far the banks remain solid, but will that continue if a tidal wave of business and personal bankruptcies washes over the globe? Personally, I think the answer is yes, but they still may trade sideways for a while.

For investors, the Covid-19 pandemic has exposed bad businesses, outed fraud and identified industry stars. As we cautiously re-open, we all want to believe that greener pastures and a Covid-19-free world lie around the corner. Still, at this time, more than ever, a long investment horizon is essential. While we can be relatively sure the world will be free of Covid-19 in 24-36 months, we have very little idea what the next 6-18 months might bring. The second wave could be one of bankruptcies or a Covid-19 resurgence and investors are going to have to ride out some rough seas for the next while.