The Coronavirus Contagion combined with the Saudi/Russian oil spat has certainly sent financial markets into the biggest meltdown since 2008/09 with no end seemingly in sight at the time of writing. Events are changing on an almost daily basis but Symvan is of the belief that we are approaching a maximum hype-cycle point of inflection in the next few weeks, and that will present a strong buying opportunity. It remains uncertain what specific event will retrospectively be viewed as the point of maximum panic, but it will probably be something that occurs in the United States – perhaps a ‘Wuhan-style’ shutdown of a major city such as Seattle?
Don't Ignore the Positives
We are not going to attempt to offer an opinion on the science behind the coronavirus contagion, but there are certainly strong signs of encouragement that are being ignored by financial markets as Europe and the USA move further into meltdown.
First, there is a clear sign of slowing infection rates in China (including no new cases on Wednesday for the first time since the crisis began) and particularly in sub-tropical South East Asia, meaning that the current restrictive practices in Europe and the onset of summer perhaps offers tangible hope to the Northern Hemisphere countries.
Second, against this backdrop of slowing infection rates, UBS reports that only 0.005% of the Chinese population is infected. Even if all these people were to die, and this was to be followed by much larger infection/death statistics in Europe and North America on a per capita basis, these numbers are far smaller than what the financial markets are currently discounting.
Third, scientists around the world are concentrating on providing a vaccine solution in what would appear to be an unparalleled coordination by the global scientific community. Moreover, this was originally given impetus by the Chinese efforts to sequence the genetic material of SARS-CoV-2 and sharing that sequence with research groups around the world. As a result, 35 companies and academic institutions are working to create such a vaccine, and the first human trials are starting imminently. Although a breakthrough on developing a vaccine puts an instant end to this current crisis, the fact that progress is being made on several fronts will soon filter through to the general public over the coming months and even pessimists believe that a vaccine solution is 12 to 18 months away. Yet this virus is unprecedented in so many ways, and so it is in respect to the amount of resources dedicated to the problem, meaning that it is not inconceivable that a vaccine will be found considerably sooner.
How I Learned to Stop Worrying and Love the Virus
The sheer panic that has infected the markets is due to a feeling of there being an economic black hole whereby it is impossible to measure the financial downside for a given investment. The aforementioned three positive coronavirus developments will probably only crystallise when more testing information is released, and particularly as it becomes apparent that the virus is more prevalent than is commonly assumed and that it is less deadly.
The WHO reported a Case Fatality Rate as high as 3.4%, and this dramatically increased bearish sentiment in the markets, but this simply measures the number of deaths divided by the number of reported cases, and it looks increasingly like there are many people who have been infected but have not been reported in the statistics that are offered daily in the press. The UK’s dramatic volte face this week, in which it announced much more draconian isolation guidelines, also involved the government making the interesting observation that the UK will soon be testing for those who had recovered from the virus but had not been previously tested and might well dramatically increase the denominator and give a much different outlook to what is currently discounted by the markets. Anything approaching this realisation will have a dramatic impact on the global financial markets.
Psycho Killer - Qu'est-ce que c'est
The psychology of investors frequently leads them to overlook something staring at them in the face, until they suddenly reverse course and pathologically focus on that set of facts that they had previously dismissed as unimportant. Hence the complete shift in investor sentiment between February and today concerning the impact of the Coronavirus.
The late economist Charles Kindleberger, author of the classic “Manias, Panics, and Crashes”, poignantly exposed numerous examples of situations where investor exuberance gives way to a reality check (how coronavirus will cause economic distress in this case) and led the financial system to move into a distressed state, followed closely by panic.
And this is where we are at present.
To put this in perspective, at similar points in recent US bear markets, the equity correction following 9/11 led to markets dropping by 14% and did not lead to a technical recession, defined as two consecutive quarters of negative GDP growth. The bear market in 2008/09 saw a market drop of 19% at this point in the correction, but this led to a serious recession which took years for the US and Europe to recover to Q1 2008 GDP levels.
The current market has already fallen by almost 30% since late February and will almost certainly fall further, but this seems overdone given that the inevitable recession seems more likely to be sharp and short. Unlike the 2008 crisis, which could have imitated the 1930s had governments not learned lessons from the Great Depression (when 1929 US GDP did not recover until the 1940s), this will be a time-limited recession (i.e. discover a vaccine or slowdown the growth rate), and one which will be greatly aided by the fiscal packages that governments have announced over the past few weeks and further measures that will undoubtedly follow.
Even if financial markets decline further over the next few weeks (and this will almost certainly happen), there is not the systemic risk that existed in 2008 and markets have almost certainly oversold leaving an almost unprecedented opportunity in the next few weeks and months. The financial markets will start moving upwards before the good news starts coming though on the real economy, and the timing and extent of the bullish market surge will depend on whether this is a sharp-V downturn or if negative GDP growth lasts for two or three quarters.
We Are Only In It For the Money
‘Never let a good crisis go to waste’, as one of Tony Blair’s assistants remarked the day after 9/11. Unfortunately, that wise woman was sent out to pasture.
Nevertheless, financially astute investors may be asking if now is an opportune time to invest into UK venture capital (VC), which is rightly known as the high risk/high return portion of any investor’s portfolio. A sceptic might usefully suggest that this is precisely the wrong time to invest into VC investments given that many businesses will go into administration over the next few months, irrespective of size or sector.
Here are three compelling reasons to invest in UK venture at this point in time:
First, 5th April is a real deadline and EIS investors will miss a tax planning opportunity unless an investment decision is made by next week.
Second, the UK government has already indicated that it is going to “do what it takes” to save British businesses that are facing Armageddon over the coming months due to the virus. Expect continual advances of monies from the HM Treasury over the next few weeks and months.
Third – and most significantly – Symvan is emphatic that our Technology EIS Fund will invest before 5th April only in those companies whose finances we have stress tested to ensure that they can remain solvent through the following twelve months amidst this crisis. We hasten to add that a number of our portfolio companies might benefit from the impact of the coronavirus crisis, but that is material for another blog entirely.