Investing in a post-COVID-19 world

The world is set to shift from an age of austerity to an age of opportunity due to the COVID-19 pandemic.

It is often said that every problem can be an opportunity in disguise.

In the case of COVID-19, the pandemic is shaping up to become the greatest existential problem the world economy has faced since the Great Depression in the 1930s. Individuals, businesses and entire economies of all sizes are facing bankruptcy and economic default.

However, if the adage is true, the next two years could also become known as the age of opportunity, after historians ponder over current times with the accuracy of hindsight.

By some estimates, unemployment rates could reach 50% in the UK and across Europe with as many as 70% of businesses requiring government support and assistance to avoid bankruptcy.

With such crushing macroeconomic developments, it’s not surprising that most market participants are not thinking about the investment landscape after the pandemic – they are simply trying to ensure their survival and reach the other side.

The effects of COVID-19, and more pertinently, the gruelling containment and isolation measures imposed by governments, will eventually dissipate. So, what can investors expect to see on the other side?

Ready, steady, print

For starters, it is becoming self-evident that Big Government is here to stay (and get bigger).

An era of free capitalism is gradually shifting into an era of state capitalism whereby governments allow the private sector to collect the rewards in good times while insuring core sectors with unlimited stimulus measures in the bad times.

As markets go up, the public bathes in capitalism and when markets go down, the public hibernates in socialism. Profits are privatised, losses are nationalised. Expect this theme to become ever more visible and active in the coming years. Most analysts agree that the post-pandemic world will see governments retaining the additional powers they legislated to impose future restrictions and to maintain control over their respective economies.

This includes influence over central banks and the propensity for an emergency print run when the coffers run empty. If deflation sets in, central banks will deliver even more stimulus to the trillions they have provided to date in response to COVID-19.

Despite all the severe price declines and volatility in all markets, commercial business (and therefore, investment opportunities) will return, only this time, there is likely to be more spare capacity and will allow investors to buy assets at better levels compared to January 2020.

Source: Investment Strategy Group, Bloomberg, Datastream.

According to a report published by Finch Capital, “digital-only” will become the financial industry default, much faster than it would have otherwise.

The report’s authors forecast that legacy institutions will likely turn to tech companies, to adopt their solutions rather than building something in-house. Such a sudden shift towards digitalisation could be a boon for fintech companies, particularly in artificial intelligence, Internet of Things (IoT) and sharing economy niches.

Online currency exchange services such as CurrencyFair, Currencies Direct and Transferwise, as well as any other online-focused businesses, are likely to weather the current pandemic better than most and could eventually obtain the bulk of new business as and when the pandemic recedes.

Other business ideas likely to be well-positioned in a post-pandemic investment climate will be debt consolidation companies, consumer and small-business lending platforms, peer-to-peer funding enablers and start-ups offering digitised services including insurance and ID protection.

Regardless of the asset class and irrespective of the geographical territory, the first 12 post-pandemic months are likely to present an abundance of investment opportunities.

In broad terms, assets that are considered “risk-on” such as equities, commodities, some currencies like the Aussie/Kiwi/Canadian dollars and cryptocurrencies are likely to appreciate after the pandemic has passed.

Meanwhile, “risk-off” assets such as government bonds, currencies such as the US dollar, the Swiss franc and Japanese yen will likely depreciate as the world emerges from its commercial hibernation.

Most poignant, and possibly the asset class that will offer the best investor returns, is property.

Property market boom

Property has always been a generative asset, regardless of economic conditions. Much like food production and utilities, property is always in demand because people always need shelter and sustenance.

The pandemic is already exerting deflationary pressure, which is likely to mean all asset valuations suffer, whereas property and utilities are likely to suffer the least. Real estate is likely to become a buyer’s market after being a seller’s market for decades (with the only brief exception being the global financial crisis in 2007-2009).

Deflation is particularly harmful because not only do prices spiral lower, a psychological factor also comes into play: if buyers expect prices to decline, they tend to keep waiting for the best possible price. Sellers respond by lowering prices, but this only serves to fulfil the prophecy and encourages a new round of waiting for lower prices.

This principle was exemplified in the so-called Japanese “lost score” between 2001-2010 as well as in the US between 1930-33 and Hong Kong between 1997-2005.

So too today. We could potentially see a deflationary spiral, or a persistently stagnant malaise occur after the COVID-19 pandemic recedes and the world economy chunters into gear. According to economic estimates from various banks and research companies, developed economies could take 12-18 months to get back to their previous high-flying record-setting peaks of strong returns and GDP growth.

The investment landscape will be opportunistic in the first 12 months with superb bargains to be had – especially in the property market, but so too in currencies.

Currency boost

Several currencies will become the go-to appreciators with carry trades also becoming a viable option as central banks begin to raise interest rates to various degrees. Most likely to benefit will be the Scandinavian and commodity currencies given their sensitivity to commodity prices.

Source: Bloomberg

Cryptocurrencies could also become a viable investment option, especially for risk-seeking investors looking for above-average returns in exchange for greater risk.

Judging by how extensively currency rates have changed over the past 3 months, we can expect to see a gradual reversal as global business returns.

The US dollar, the Euro, the Yen and the Swiss franc are all likely to experience sharp unwinds while Scandinavian and commodity currencies receive strong bids as investors put their cash hoards out to pasture post-pandemic.

Gearing up for a restart

From an investor’s perspective, the next two years will be some of the most challenging, yet also the most exciting in living memory.

In the near future, there will be a surplus of investment opportunities for all investors. Even for financially aspirational novice investors willing to punt a small amount on crypto.

The developed world is set to shift from the age of austerity to an age of opportunity which means previously marginalised individuals including those not able to get on the housing ladder, will now have the best opportunity they’ve ever had.

More broadly, investors will have plentiful opportunities to generate above-average returns in equities, commodities, property and currencies with crypto likely to experience significant appreciation as the world accepts a more digitised economic status quo that could even go entirely cashless.

Investors should prepare themselves for a new world built on digitisation and new ideas offering a rapid recovery built on automation, interconnectedness, digitisation, robotics and artificial intelligence.

A brave new world indeed.

George Tchetvertakov

George Tchetvertakov has vast experience in the foreign exchange area. He works for companies like Alpari, one of the top forex firms in the UK, and for Moneycorp, one of the industry leaders in money transfers, among others. Nowadays he is a freelance writer who writes for us, as well as large publications and several publicly traded companies.

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