Brunswick’s Tim Daubenspeck offers a frank yet reassuring assessment of the markets in these uncertain times.
The recent market selloff has been unnerving to enterprises, investors and onlookers in its violence and speed. The primary cause is the supply-and-demand shock from Covid-19. We will not try to predict the length or severity of the market impact of the virus. Instead we’ll offer context that might aid companies in navigating this threat and its impact on long-term decision making.
After a 10-year-plus bull market in equities and a long period of relative calm in the markets, the Covid-19 threat has had a swift and material impact on companies across the globe. The disruption in Asian manufacturing rippled through supply chains all over the world at the start of the year. Then social distancing delivered a powerful hit to demand, as consumers cancelled travel and focused inward on families and communities.
Seeking parallels, investors will look to the financial crisis of 2007-2008, SARS or the Spanish Flu of 1918. But in this crisis historic models may not be of much use.
One comforting point is that despite steep crashes, market controls so far have functioned reasonably well, with no material cracks in their foundations. We are not in a position to guarantee the persistence of this functionality, because the knock-on effects will not fully be known for weeks or months. Companies will likely have difficulty refinancing debt. Cash flows and working capital will be challenged and we will have to wait to see what types of mechanisms governments put in place to aid liquidity for many industries. Weaker industries, companies and countries could face extreme challenges, but so far it appears that the cause will not be a lack of structural soundness in the markets.
Despite a prolonged period of low rates and relative market calm, we are not entering this downturn with the bubble-fueled baggage of the 2007-2008 crisis. There are likely bubbles out there (there always are) but we do not believe they are anywhere near as egregious or dangerous as what we saw 12 years ago. Additionally, we entered this downturn with relatively high employment levels and a consumer balance sheet that is not as overstretched as in our most recent recession. Once you factor in the twin tailwinds of low rates and cheaper gas, consumers should eventually be able to contribute to the recovery. While these factors hopefully lead to a relatively short and shallow recession, the magnitude of unemployment levels will ultimately determine how long it takes for the recovery to take hold.
There is one point on which we all can agree: The Covid-19 crisis will leave a lasting impact on huge portions of our organizations. Supply chains will be redesigned, employee resiliency plans will be bulked up and risk models will be rebuilt factoring in new threat vectors. Employee relationships will likely be redrawn as the benefits of the gig economy are weighed against the need for worker support mechanisms. From extreme stress there often emerges positive change, and hopefully we all exit this crisis smarter and better prepared for future challenges.
As for the human impact of this potential pandemic, we appear to be in uncharted waters. At some point soon we may be able to predict the human toll of the virus. But the emotional and psychological toll could be intense, long-lasting and unpredictable. Consumer behavior may change in ways that impact the economy long-term.
Companies must factor in the necessary and additional costs of mitigating business risk from this and potential future epidemics. There will be companies that fail and industries that are materially damaged under the stress of this epidemic. But following past crises, the global economy and capital markets found ways to rebound and thrive. In that sense, this crisis is no different. We will persevere and thrive again.
Tim Daubenspeck is a Partner in New York with 20 years of buy and sell side experience in equities, with both public and private companies in North America, Europe and Asia.
This article appears courtesy of the Brunswick Review.