Memo - March 29, 2020
Coronavirus & Economy
The number of coronavirus cases continues to grow exponentially. It is most likely the case that the total number of cases is higher because we have not prioritized testing. Burundi was recognized as the only African country without any case of coronavirus. When the Minister of Health was asked about the secret behind the zero cases of Covid-19, he said, “It is very simple. We don’t have the testing kits.” “Fortunately, although there is some uncertainty, the case fatality rate is…about 1 % if you have a medical system that can take care of the severe cases. This is very bad but still not the worst case” (Bill Gates).
On Friday, President Trump signed the $2 Trillion legislation in the Oval Office. This stimulus package will help solve the issue of a decrease in economic activity caused by the coronavirus pandemic. However, the bill only provides relief in the short-term.
As of March 21, 2020, roughly 3.3 million Americans filed for unemployment claims. Only time will tell how the economic activity will balance out.
The coronavirus has impacted the world’s wealth, health, and relationships. There is high uncertainty on how severe the consequence of the coronavirus will be. The best solution is a vaccine or some form of medical treatment. However, there is significant uncertainty about how long it will take to find a medical solution.
One positive aspect of the coronavirus is that most – more than 95 percent – people recover within two weeks. Many don’t even realize that they have the coronavirus. Therefore, given a long-term horizon, it is a high probability bet that the coronavirus pandemic should fade away, and economic activity will resume.
Markets
We should always look at the market from a valuation standpoint. Observing the change and in price and making decisions is not investing. That is speculation. The investing philosophy has not changed since the first recorded primer Aesop who said, “A bird in the hand is worth two in the bush.” The two variables that Aesop missed were interest rates and time.
The primary variable in investing is the interest rate. Currently, interest rates are low. However, it doesn’t mean that the interest rates will stay low forever, or that it can’t go – negative – or any lower. Given that the interest rates are low – around zero – and the S&P 500 index Shiller PE ratio is around 23.99, the market overall is still reasonably valued.
Given the low-interest rate, a long-term value investor will find undervalued companies. The industries that have declined the most will most likely have the greatest opportunities – not always. The industries that have declined the most are: 1) Energy Equipment & Services (-65.01%), 2) Oil, Gas & Consumable Fuels (-50.91%), 3) Airlines (-48.39%), 4) Auto Companies (-45.83%), 5) Automobiles (-43.68%), 6) Consumer Finance (-40.04%), 7) Distributors (-39.67%), Banks (-39.66%), 8) Leisure Products (-37.84%), and 9) Real Estate Management & Development (-36.04%).
In conclusion, long-term value investors will find opportunities of a lifetime. However, it is highly recommended that 1) long-term value investors be very selective because many companies may not survive the epidemic. And 2) invest in companies with a margin of safety of 50 percent plus because many variables such as interest rates may change, which affect the valuation.
Cordially,
Rojan Shrestha