Finance Technology Leverage LLC

The coronavirus financial impact: great opportunities emerge from economic disaster

The coronavirus financial impact: great opportunities emerge from economic disaster

The coronavirus pandemic is a natural disaster that many people saw coming, but few prepared for. Look out for huge market shifts as weaker companies fall away. Those that survive will be the market leaders of tomorrow.

Let’s be clear—although unique, the coronavirus pandemic is a finite financial problem.

At some point, the pandemic is going to end. And when the pandemic is behind us, the global economy will come back to life. But it will not be financial business as usual.

A natural disaster, not a typical recession

We have all weathered financial shocks before, but they were nothing like this. I understand the temptation to deploy shorthand terms to describe this strange new economic climate, but what we are experiencing right now is no “black swan” event, nor is it a “Greater Depression,” or a simple, standard stock market crash. The economic downturn of 2020 is not a man-made crisis undermining the value of the global economy. Instead, the coronavirus crisis represents an acute destruction of value. This pandemic is more like a natural disaster on a global scale.

The global financial crisis of 2007-2008 did not make millions too sick to work nor cause hundreds of thousands of deaths. When the mortgage market went into meltdown, houses did not cease to exist. The world was still the world. We did not really experience a complete reshuffling of global economic norms.

The coronavirus’ impact on the economy is different. In a shockingly short time, economic activity has just stopped; manufacturing has stalled, and supply chains have been broken. People are sheltering in place and reducing their spending and consumption.

Federal and statewide lockdowns and fear of infection have reduced travel by some 95%, according to the most recent airline data. I witnessed this first-hand on a recent journey from Chicago to London. Sitting in eerie silence on a sparkling new Dreamliner, I counted no more than ten passengers and perhaps a dozen crew members. On arrival in Heathrow, just one immigration officer was required to process the trickle of international travelers.

Where feasible, industries are switching their factory output to pandemic-related products, such as preventative solutions (masks), interventions (ventilators), treatments (medicines), and prophylactics (vaccines). Other industries and their production lines have simply shut down and laid off their workers.

This damage is snowballing. Investment in research and development will pause, as corporations will not, or cannot, invest in innovation and growth. This means fewer new products and services and in turn, less market diversity. So, in the fall and next year, consumers will have fewer choices.

We may need to wait an extra year for that new iPhone, the latest Tesla, or the next big breakthrough in aerospace technology. Or it may never come. The world is going to be a poorer place, at least for a little while.

Let’s follow the money, as it loses value

This global economic downturn is also unique in the way in which it has destabilized what during normal times we called safe havens.

With the Federal Reserve and other central banks pumping massive amounts of money into the market, money will become less valuable. We have already seen dramatic rate cuts in the US and across the world. This means that savers will lose out again, just as they did in 2007-2008. But this time, the government bond market will suffer as well.

These safe havens have disappeared because the natural disaster driving the recession is global. Every country’s economy is being forced into the same stage on the economic cycle, so there is no opportunity for arbitrage. Quantitative easing in the context of the damaged global economy will drive up inflation.

Governments like to see the rate of inflation increase because it allows them to repay their debt with less valuable money. But in the old, normal, world when one government did this, the value of its money fell relative to other countries. That acted as a check, limiting its currency inflation options. In a coronavirus economy, every nation is trying the traditional solution. The result is all currencies lose value, relative to the cost of goods. One effect is that sovereign debt, typically a safe investment, becomes a money loser.

So, where does the smart money go?

Struggle forces change; change creates opportunity

All this doomsaying does not mean that innovators and visionaries will simply set their brains to pause during this time. Crises mean change and change always generates opportunity. Yarn-spinner Parkdale has organized fashion brands to retool and switch from making hoodies to masks. Having pivoted markets and tasted this new industry, these brands may never wholly switch back.

“Crises mean change and change always generates opportunity.”

We are all forced to get creative and innovate out of economically distressed times. What drove General Electric, IBM, General Motors, Disney, FedEx, Microsoft, Apple, Google and Facebook to be successful? Struggle, challenge and change. All these brands were created or had their formative years during economic hardship. Challenge drives focus. Great leadership thrives and poor leadership dies as entire industries experience a Darwinian consolidation. This is natural selection in its most brutal form.

The fundamentals of the market will remain intact, but the weaker players will have fallen away, leaving the stronger ones free to charge ahead with their growth plans.

Since the last recession, there has been a decade of good news from public corporations. But sometimes success during a buoyant economy masks poor decisions. Look out for strategic news dumps over the next few months, as corporations attempt to bury bad news under pandemic headlines.

But they cannot be totally hidden. These under-the-radar updates will show smart investors which companies have strong fundamentals. It will also shine a light on those that were propped up for too many years by a benign and mostly prosperous economy.

For most businesses, the pandemic will lead to a very real loss of value. Many will not survive. Others are likely to become highly attractive targets for traditional private equity firms, which love to buy distressed companies at a discount.

Challenges are generating opportunities

Much has changed since Covid-19 came to town. But there are some principles hardwired into humanity that do not change. We are great at identifying and driving positive outcomes from adversity.

There will be a very small window of time where the future goliaths, those brands that will emerge like Google, FedEx, IBM and the others, will be accepting much lower valuations than they would in normal times. That is okay for them and the investor. The investor gets a better deal. The company secures the financing that it needs to build out its product portfolios and invest in growth to become a future household name.

Here is just one great example of a superficially negative challenge creating a positive opportunity: oil. West Texas Intermediate (WTI) prices plunged into negative territory in April, forcing some oil producers to sell their properties at ridiculously low prices, since they cannot afford to hold onto them and lose money. But we know oil prices and values will bounce back. We still need to fuel our cars, heat our homes, and maintain our machinery – we just do not need to do as much of it right now.

That makes oil a great value investment strategy. The same is true of any other solid, cash-creating company.

Be creative with investment solutions

It is hard to do these things on a meaningful scale within the confines of the public markets. Smart private equity firms will be motivated to seek out and cut deals outside of the public markets, to benefit both their investors and the companies they invest in.

But to really capitalize on these new opportunities, a strong risk mitigation strategy is key – especially in these uncertain times. Only then can investors take advantage of this new economic order and place their money with confidence while we ride out this storm together.

Frederick is the Founder and Chief Executive Officer of Finance Technology Leverage (FTL). By financing exciting and challenging projects, FTL unlocks new advances in energy, industrial technology and the life sciences. Contact us  for more information.