COVID-19: Why 2020 is not 2008 – the fund manager view
As we consider how the world will recover from COVID-19, it is vital that we remain aware of how this crisis is very different in nature to the market shock of 2008/2009 and understand how this will shape our path back to growth.
Compared to the technology bubble at the turn of the century and subprime housing crash of 2008, there was no indication in early 2020 that the market had suddenly reassessed its understanding of prices.
We were in the middle of an 11-year bull market, underpinned by low interest rates and vast amounts of liquidity, thanks to globally-coordinated quantitative easing programmes.
Unlike 2008, this is an exogenous crisis – it is not about a fundamental mispricing of assets and a sharp split between market participants. Endogenous risks such those endured previously are hugely difficult to unravel as they can leave the fundamental structure of markets deeply fragile.
Whereas 2008/2009 left the banking sector dazed and confused, 2020 has seen it resilient and responsive. Bank balance sheets were more prepared for shocks, as a result of higher capital requirements and new policies and regulations to support financial institutions and their customers.
As the coronavirus pandemic spread, the financial sector also benefited from the significant support of governments and central bank policymakers. But while these coordinated responses have been extraordinary, helping to shore up financial markets and retain liquidity, the success of the rescue packages is reliant on how the pandemic continues to evolve
Below, four AXA IM experts outline their experience of the 2020 COVID-19 crisis and explain how it compared to 2008/2009…
CIO Core Investments, Chris Iggo
Whenever there is a crisis, things change. The frailties of the economic system were cruelly exposed in 2008 by the financial crisis and have been once again by the coronavirus in 2020. The challenge for asset managers following 2008 was to adapt to a rapidly changing regulatory environment. The focus was very much on improving governance across the whole financial services sector.
That led to increased costs and more compliance. In time, however, it probably accelerated the shift towards more responsible investing. Today’s crisis started outside of the economic system. All businesses are challenged and there has clearly been a massive human cost, the likes of which were not seen in 2008. Yet in a sense there is more opportunity today than there appeared to be in the dark days following the collapse of Lehman brothers and the recession that followed. Our focus, as investors, is even more on responsible investing.
The pandemic has made us all reflect on existential threats but also on the value of human wellbeing and diversity. Both 2008 and today required massive government interventions to prevent very bad situations becoming even worse - and the legacy of that will continue to shape economic policy decisions in the future.
I am hopeful, however, that the opportunities presented by the need to focus on health, on technology and changing business and consumption models can allow the asset management industry to continue to flourish. I have never thought during these past weeks that our business was doomed but that was the feeling many of us had in the depth of the financial crisis.
Head of Active Fixed Income (Europe), Marion Le Morhedec
Perhaps the biggest difference between 2020 and 2008 is that 12 years ago the financial services sector was a major part of the problem - but during the COVID-19 crisis, it has been very much part of the solution.
Another contrasting factor has been the length of the liquidity crisis; it has been very brief in 2020 - closely linked to the lockdown. I’ve been through episodes of low liquidity and it is always stressful given the potential impact it can have on performance - and therefore clients. But central banks acted swiftly, ensuring decisions made at the macro level were being implemented at the micro end. The introduction and day-to-day consequences of quantitative easing (QE) were much quicker in 2020 versus 2008/2009.
But regardless of any market crisis, I think the fundamental reasons to invest – to actively take positions - remain the same. Our process is based on Macro, Valuation, Sentiment and Technicals (MVST) analysis and this year the latter has been driving and dominating our investment decisions, which is exactly what happened in 2008.
Like all crises, any period of massive stress creates investment opportunities – and thankfully we’ve been able to capture many, especially in the credit universe. We’ve been extremely active in this period. However, looking ahead, we will need to be highly selective as we believe there is less direction in markets, so I expect active investing will be much more about micro than macro allocation across fixed income.
Our investment process has been continuously improving over time and has shown that we can provide performance in different type of market environments. However, the crisis will have a lot of implications - the way we all work and live is going to be very different. But I believe environmental, social and governance (ESG) investing will be a beneficiary of the so-called ‘new normal’.
Green bond issuance and social and sustainable bonds issuance is likely to pick up - there is strong momentum here already. In addition, we anticipate massive investments from governments and agencies around climate change – and to support jobs and diversity. This new trend gives an additional sense of purpose to fixed income investment that we welcome as responsible investors.
Framlington Equities Senior Portfolio Manager, David Shaw
Given the speed at which central banks and governments reacted to the COVID-19 pandemic, it was abundantly clear that lessons had been learned from the previous crisis. The hit to markets and economies cannot be underestimated, but in my view a banking crisis is the worst kind - chiefly because of the knock-on effects on the broader economy.
Understandably markets are currently beleaguered by uncertainty. But I don’t think there was ever that much concern that the banking sector was going to collapse. Like the wider market, bank shares have taken a hit, but their performance has also reflected the backdrop of low interest rates – and the expectation that they will remain in the doldrums for some time yet. Nonetheless we have not witnessed the level of panic selling which took place in 2008, as banks’ reserves are far more robust these days.
During the time of the global financial crisis, bank shares fell 79% between the end of 2007 to the trough in March 2009, according to the KBW Bank Index. This time around they endured a 42% fall during the first three months of the year – but have since regained some ground, to the tune of 15% by circa mid-July. In 2008 we didn’t know how long it would take the market to recover, and ultimately it took a long time. This time, given the liquidity and central bank support, it is reasonable to think the rebound will be quicker.
US consumers are in a much better position compared to 2008/2009 when they had virtually no savings as for most people, the majority of their wealth was tied up in the then ill-fated property market. Notably in the US during May, a strong jump in permits for future construction suggested the housing market was starting to emerge from the coronavirus crisis. The US savings rate – as a percentage of disposal income - amounted to 7.6% in 2019 but by May 2020, it had jumped to 23.2%.*
From an investment point of view, certainly, last time I owned some companies which I thought were in a better financial position than a lot of their rivals. This time my focus on strong balance sheets has been front and centre. A strong balance sheet is worth more than you might think in terms of traditional valuation metrics even with the financial support and stimulus that is coming. Looking ahead, I am cautiously optimistic. Once US consumers are in a good place, they will spend - if they are confident that they will have a job to come back to.
One issue to note however, is that it really felt post-2008 that the businesses that survived and prospered had a strong culture and strong sense of mission. Such firms often cut salaries and not jobs. This factor, surrounding social governance, certainly became a standard question for most investor/company meetings following the crash. I expect this will become even more of focus going forward.
Rosenberg Equities Global CIO, Gideon Smith
Parallels are often made between the (apocryphal) Chinese curse about ‘living in interesting times’, and the experience investors have of living through ‘volatile’ times – market volatility often being the defining characteristic of periods of crisis.
It’s certainly the case that the peak volatility equity investors experienced during the financial crisis of 2008/2009 and the COVID-19 crisis of today were similar. As equity investors, our job is as much about managing risk as it is about seeking returns, and our experience 12 years ago focused us on the need to be decisive in our response to volatility.
In this case, that need for speed was even more imperative as the market moves were far more rapid – during the previous crisis it took 18 months for the markets to fall from peak to trough; this time it took just 22 days. Furthermore, the government response was far more emphatic on this occasion – as one institutional investor noted: “They showed up early and they showed up big.”
As we considered our response we focused on the distinctive characteristics of this crisis, and the structural features we see in the market – not least the higher levels of profitability some companies appear to be able to sustain and the dispersion in profitability. This reflects a less competitive world, but it also means that the impact of the crisis has not fallen evenly across the market.
During times of crisis it is normal to see a ‘flight to quality’ – but those safe havens have evolved and shifted. Today it is the mega-cap stocks of the technology sector, with their mountains of cash and their ‘profitability moats’, that have provided that safe port. As we look to 2021, this is leading us to evolve how we think about profitability, quality, and defensiveness – and the types of stocks we consequently invest in.
There are also some salutary lessons from 2008/2009 that we must keep in mind – as the world emerged from that crisis it sparked a decade of inequality, with individuals and small businesses being disproportionally hit. Those themes have not gone away. This may further underpin the competitive advantage of larger companies. But equally, it may also create opportunities for those corporations that are able to democratise access to healthcare and technology.
Returning to Chinese apocrypha, people often cite the Chinese word for “crisis” as being composed of two Chinese characters – those signifying ‘danger’ and ‘opportunity’ respectively. Apocryphal or not, as investors we must keep both ideas in mind as we go about our business in the coming year.
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