Equity markets have started to recover from the lows seen mid- March. This is partly due to a slowing growth in new infections in some European countries, which leads to discussions on a potential loosening of the lock-down. We believe that investors start to focus on the after-corona and assess the impact of the human and economic damage done by the virus.
The economic toll is substantial. For example, according to German IFO Institute, the current lockdown costs the German economy between 150 billion and 260 billion EUR a month due to the standstill of the industrial sector, trade and services. With every month passing, the cost is increasing and the return to normal takes longer with rising unemployment.
Central Banks and governments acknowledging this fact have been proactive to such an extent that their measures exceed the ones we have seen in the financial crisis. That is why Ed Yardeni, the well-known equity strategist from Yardeni Research, is no longer speaking about the Fed throwing helicopter money into our economies like what we have seen during the financial crisis. He is now speaking about B-52 bombers throwing carpets of financial weapons in order to make sure our economies are not falling into another Great Depression.
We believe he is 100% right and the size of the central bank’s intervention should not be underestimated.
Central bank’s balance sheets are now expanding at an unseen speed and currently represent 40% of the GDP of the G4 countries:
Source: Colombo Wealth Management
Central banks are literally “throwing money at the wall till something sticks”. This week the Fed has even accelerated the pace by announcing that the bonds of the so-called falling angels, the bonds with very low credit quality, are eligible under their purchase program. Even High Yield ETFs are now eligible for being purchased by the Fed. This is truly unprecedented.
Where does this leave us as investors in value stocks? The companies we have in the portfolio are of course negatively affected by the crisis. Many have announced cost reduction measures, gave up their profit guidance, suspended dividends and share-buyback programs. Anecdotally, I can only think of one exception: the Belgian diaper producer Ontex announced a 6.8% like-for-like increase in sales in Q1. The rest of the portfolio companies are impacted and will see their 2020 earnings at least being hurt somewhat.
Nevertheless, we need to remember that our companies will survive the crisis financially as they have financial staying power in terms of strong balance sheets or liquidity reserves. Once the situation normalizes, and this may be quicker than expected partly due to the B-52’s throwing liquidity into the system, they will return to their long-term earning power. If you measure our portfolio companies to the cash flow they are able to generate in normal circumstances, they are real bargains.