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A cash crunch conundrum with opportunities for investors

JH18062020

Investors are at a crossroads with varying opinions on market valuations. Investors on the side of caution believe that the market run up is not justified given the dislocation between the real economy and financial markets. Conversely, upbeat investors side on the thought of encouraging economic indicators following the lockdowns observed, in particular within the United States, as well as, the commitment by policy makers around the world to keep on pumping the cash to aid businesses and prop up demand. In a matter of few months, markets went from grappling with a cash crunch for underlying businesses to valuations that made it an opportunity for wealth creation.

A widely accepted scenario is that a vicious second wave that leads to a lockdown will pose significant downside. Should a March-like lockdown occur again throughout the globe, businesses will again pass through an uncertain squeeze with the only possibility for survival hinging on government intervention. However, the rhetoric does not seem to support this scenario, as governments around the globe have diluted the possibility given that health authorities are better equipped for a resurgence in cases. In the meantime, significant inroads have been made for the treatment of severe Covid-19 cases through medicine such as Remdesivir and the most recent Dexamethasone which is being considered as a breakthrough in the fight of the deadly virus. Investors need to keep in mind as well, that by the day, the discovery of a vaccine becomes ever more probable given the global collaboration undertaken by healthcare companies. The impact from Covid-19 has been global which meant that the response has been global. This means that despite the traditionally long timeframes for vaccination, in this particular case, the process will be different and by consequence presumed to be shorter.

The elephant in the room remains anchored on the possible shock that may emanate from a second wave around the globe. However, investors with a medium to long-term horizon should deal with this risk in a manner, which has already paid off ever since markets fell during the month of March. Investors during the month of March that bought into the fall in markets could only justify their investments if taken in a medium to long-term context. Similarly, albeit, on a smaller scale, investors need to embrace the medium term dynamics in a post-Covid19 world. Naturally, investors find it difficult to look beyond immediate risks, and tend to focus on the short-term dynamics that may impinge on their long term optimal asset allocations. This is where discipline on asset allocation and the deep-rooted belief that economic growth and investment values are positively correlated in the long term come into play. Accordingly, investors need to ensure that their exposures are within industries that have the potential to benefit from a medium term upturn in an economy.

Cognisant of the fact that markets have steadily recovered from their extreme low levels experienced back in March, investors need to keep anchored on their medium to long term objectives. This means that asset allocations remain the key pivots to ensure discipline, whilst taking advantage of opportunities that are still present following the run in markets experienced in the last few weeks.

This article was issued by Jesmar Halliday, CFA. Discretionary Portfolio Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

The Calamatta Cuschieri Traders Blog is available daily on CC WebTrader. Other market coverage including coverage of the International Bond Markets is also available.

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