Apr 2, 2020

Cameron Bagrie on the economic impact of COVID-19

It's all about the long term

There is no point sugar-coating the obvious.

The world, New Zealand included, is entering a recession. Difficult times deliver both challenge and opportunity. Let’s not forget there are always two sides to the equation.

On some levels we shouldn’t be surprised. It happens every ten or so years. New Zealand, and the global economy were due. It’s one of the most uncertain environments I have ever seen.

We’ve been hit by three black swans.

  • Black swan 1# was Covid-19 - part one, and disruption in China and the supply chain. Getting stuff in and out became challenging.
  • Black swan 2# was a collapse in oil prices. That triggered concerns over debt and whether investors are being compensated for risk.
  • Black swan 3# is Covid-19 - part two, a virus that has gone exponential and is now requiring border control and the effective shutting down of economies as we move into isolation. We need to stop the spread.

For a globalised world, and any economy specifically, this is a huge hit.

The shock absorbers have kicked in. We’ve seen a massive response globally and locally and it’s moving by the day.

Interest rates are now basically zero. The Reserve Bank has committed to keeping them low and is buying bonds to ensure so. We are engaging in what is called quantitative easing (QE). Banks have reduced deposit and mortgage lending rates. The government is undertaking the biggest fiscal injection in our history.

Money is being put in people’s pockets to stem the negativity from job losses and hits to business income. The government are backing banks via a business lending facility to make loans and keep the credit lines open. The Reserve Bank has relaxed rules the banks operate under to assist with the provision of liquidity and loans.

New Zealand can do this because we’ve taken steps to save for that rainy day. It’s now pouring. Net debt for the government is 19 percent of gross domestic product. It’s going a lot higher. Making the banks safer in the past decade has meant we are now in position for banks to step up and put more liquidity into the economy.

The New Zealand dollar has fallen – a lot. Will this avert a recession? No. But it will dampen the downside.

We need to be realistic about what the future may entail. Firms will fail and unemployment will move up. We’ve seen it every decade during major events.

That said, I’m not a believer in Chicken Little commentary. Yes, we are going to take a hit, but the sky is falling style assessments don’t help.

As a parent and investor, New Zealand looks pretty dam good. I’d rather be here than anywhere else. Investing is often about relativity not absolutes.

There will be opportunities out of this. A lot of people and businesses have been struggling to find good deals. As economic conditions shift, capital from these groups will be deployed, at an appropriate price. The digital economy will flourish. Healthcare too. New Zealand provides food. The world needs food. Witness supermarkets locally and imagine if you lived overseas. Well capitalised businesses could benefit. Highly leveraged ones will not.

In an environment of isolation, DIY will become a pastime (and learning experience). Gardening too.

For firms it’s about market share rather than the market. The recovery when it comes will have you in a stronger market position. Quality counts.

Let’s not be couch potatoes when we isolate. Smart firms and individuals will take the time to learn and improve. How many times do businesses owners use the excuse they don’t have time to do the training course? Well, you now have time. Find something online. Learn.

While predicting the future in the current environment is prone to huge variability, we should accept that there will be significant structural changes when we come out the other side. Life will not go back to “normal”. That’s what happens after major events. Smart firms will look to leverage off what these changes could be.

Do we have a benchmark for the path ahead? I don’t think so. This is a health crisis with severe economic consequences. It’s uncharted territory.

We went in hard during the global financial crisis in 2008/09 but the economy in general came out the other side as asset prices bounced on lower interest rates. But it took some sectors such as international tourism six years to recover.

This event is worse than 1987-1991 in terms of the up-front hit, but we know from that episode that it took a long time for the full extent of economic problems to ultimately materialise. Brace for some dead cat bounces but a long slog.

That’s an exciting market not a boring one. For long-term investors, that’s an environment where you could get, and execute, on the best deals. But it’s about being patient and focusing on the long-term because the biggest certainty is uncertainty.

While Bagrie Economics uses all reasonable endeavours in producing reports to ensure the information is as accurate as practicable, Bagrie Economics shall not be liable for any loss or damage sustained by any person relying on such work whatever the cause of such loss or damage. The content does not constitute advice.

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