#30 - Ruh-Roh

I miss January……it was a simpler time. The UK and our chums in the EU had finally shaken off the Brexit paralysis which had hung around like a bad smell and constrained us for the last couple of years and everyone (be it corporations or consumers) was ready to move forward and start conquering the world again. There was dare I say it “optimism”…..which had previously felt like a taboo word in the context of it all. However, on the far side of the world in Asia, a storm was brewing that in many ways feels certain to make Brexit pale into petty insignificance….if it hasn’t already.

Coronavirus disease 2019 or COVID-19 has ushered in the new decade with biblical force. Not only is the loss of human life expected to be substantial but global financial markets are weathering the worst storm since the crisis in 2008. At time of writing, year to date performance on the S&P 500 at -16%, NIKKEI at -26% and STOXX 50 at -31% is only the tip of iceberg in explaining the true consequences of the virus. Many believe that the impact of inactivity on consumption from travel bans, enforced isolation and other globally imposed restrictions is likely to throw the already fragile global economy into a recession. This is also further compounded by the decade of supportive monetary policy from the world’s central banks to try and maintain global growth on a stable and predictably positive trajectory.

However unlike the last financial crisis where the world’s financial custodians and banking institutions were undercapitalised and over levered, the real concern this time round comes from the ballooning $19 trillion of risky corporate debt that has been compiled by global companies making the most of low rates, cheap borrowing costs and an insatiable appetite from investors in a never ending hunt for yield. We face a wall of corporate defaults predominately induced by zombie corporations who have stayed afloat by bolstering their balance sheet liabilities while top line revenue and cash flows remain anaemic.

And even when we see the end of the COVID-19 pandemic (which still feels a long way from being clarified), the delayed impact on companies’ earnings from the virus has the potential to stretch out far longer than the virus ever intends to hang around for.

To touch on cars briefly, it should come as a surprise to no one that cyclicals will be getting absolutely smoked over the near future. The already fragile auto industry is likely to see much consolidation (which is not necessary a bad thing) and the obvious candidates such as Aston Martin and Jag Land Rover are likely not to be around for too much longer…..under their current ownership structures at least.

In terms of investments, I strongly believe that up and coming tangible alternative asset classes such as Classics Cars, Modern Classic Cars and Whiskey have the potential to weather this global storm well relative to other traditional asset classes. The new age of the “physical flight to quality” is upon us and the idea of having an investment parked in your garage meters from where you sleep and eat seems infinitely more interesting than any electronic confirmation of value….at least in my opinion anyway.

Stay safe and wash your hands,

Greg