The eventual recovery from the coronavirus crash will look very different to the one that marked the end of the financial crisis in 2009, industry experts have warned.
Performance of index in 2020
Source: FE Analytics
From the point the market bottomed out in March 2009, the subsequent relief rally was dubbed “the dash for trash” as assets that were dropped at the height of the crisis rebounded to the top of performance tables.
However, fund managers claim that the recovery from the coronavirus crisis, when it finally arrives, will more closely reflect business fundamentals.
“Every crisis is different so every recovery is also and we need to be careful trying to draw parallels with the past,” said David Coombs (pictured right), who runs the Rathbone Multi Asset Portfolios. 
“I believe the same companies and sectors that were doing well before the crisis will continue to do so. That means favouring growth over value.
“Inflation will be a concern given the level of monetary and fiscal easing, and we have already started to think about how we mitigate that. Growth over value will also perform better in that scenario.”
As a result, he is increasing his exposure to tech and biotech tech names on the back of the fall in valuations, adding that the crisis has served as a reminder of our reliance on technology and communications.
Numerous other managers have warned that a strict value approach may be ineffective in the recovery as this will not take into account the way the pandemic is likely to change our way of life.
James Klempster, director of investment management at MGIM, pointed out that while banks and financials were at the epicentre of the 2008 crash, this sell-off has been triggered by more broad-based economic concerns.
“We are in the midst of both a demand and a supply shock and as a result the short-term economic impact is severe and widespread,” he explained.
“Longer term, some businesses will see their operations change permanently as a result of the recent events.”
Simon Gergel (pictured left), manager of the Merchants Trust, added: “It is critical to separate short-term impacts on industries and businesses (even if they may go on for quite a while) and longer-term impacts. Will people change their habits with regard to flying? Will companies change their just-in-time supply chain management processes? These are some of the questions that investors should be thinking about to understand the long-term impact of this virus.”
As with most downturns, analysts agree one of the most important factors in the months ahead will be debt.
Karen Ward, chief market strategist EMEA at JP Morgan Asset Management, said that the difference between today and a decade ago is that the banking sector now looks well capitalised, meaning the risk of another crisis in this sector is low. Meanwhile households, particularly in the US, have not overspent in this expansion.
She said it is a different story for corporates, however, which look more vulnerable in light of the rise in leverage over the past decade.
Phil Smeaton, chief investment officer at Sanlam Private Wealth, said this will be especially important in light of the shutdown of large parts of the economy.
“To protect yourself from a once in a 100-year event then companies with strong balance sheets and net cash are well positioned,” he explained.
“Highly leveraged companies are vulnerable to slowing growth as they have assumed an expanding economy will enable them to pay down the debt.
“It’s a bit like the homeowner who has stretched themselves to buy a house they can’t afford, only to be told by their employer that there is only enough work for four days a week.”
Stephen Yiu, manager of LF Blue Whale Growth, said a lack of debt will not just be important in protecting a business against the impact of the recession, but will help it outperform when it comes out on the other side.
This is why the ability to deploy cash is one of the key characteristics he looks for when buying companies for his fund.
“As cash-generative businesses with strong balance sheets – essentially an emergency fund to weather the storm and a war chest to invest capital – they are in a great position to grow market share when their competitors are dialling back or going bust,” he said.
Yet others warn about the importance of humility. Dan Brocklebank, head of Orbis’s UK business, said that while he believes the recovery from this crash will look very different to the rebound in 2009, he wouldn’t like to guess its exact shape.
“Every crisis has its own cause and unique profile, but they all also have a way of distracting attention from other seismic economic changes underway,” he explained.
“Take the 2008-2009 financial crisis for example: while it certainly had a profound impact, it also distracted many investors’ attention away from the emergence of the smartphone and the huge economic impact of that. At times like these it really does pay to step back from the noise and focus as much as possible on the long term.”
And Coombs believes one dominant theme of the past few years that has largely been forgotten about as the pandemic has taken hold could begin to prove its worth once the darkest days are behind us.
“Company responses to the crisis will re-open the definition of ESG,” he said. “Those that stand up for the good of the public should be rewarded, even if they do not satisfy all boxes yet, surely?”