As earnings season gets underway we can expect a familiar raft of forecasts from a myriad of sources proclaiming that ‘XYZ market has bottomed’, ‘we’re expecting a V-Shaped, U-Shaped, W-Shaped or a Windings Recovery’, ‘a deep recession, shallow depression, a deeper shallow recessionary depression or some similar new expression is priced in/not priced in’ and so on to spout forth from those ‘in the know’. The reality is that no one knows how these next few months will play out. 
Governments, economists and fund managers are not in control. Covid-19 is in control. And until the virus can be controlled, it will continue to call the shots.
So attempting to make any firm forecasts seems unwise at the moment. Oppenheimer’s John Stotzfus put it perfectly when said we’re “flying into earnings season without instruments”.
Now, I’m a simple chap, so I like to think of things in a simple-to-understand way. It’s not just us humans who have Covid-19 – it’s the world economy too, and in particular the companies that drive it. There is very little difference.
So, nearly all companies are at risk. Some will not contract it. Of those that do, some will have mild symptoms; some will become quite ill; some will need hospital treatment; some will need oxygen to keep going; some will be placed on a ventilator; and some will not make it.
As with we humans, it will not always be obvious who will fall victim. Many companies had underlying health issues as we went into this. Some succumbed quite quickly (FlyBe and Debenhams spring to mind).
But, as with humans, the underlying health issues were not always obvious and I’m guessing that there will be many corporate victims before this is over, many that we’d never heard of but some names that will both shock and sadden. Every casualty will be felt by those closest to it and, as with the human virus, I suspect that it will be indiscriminate in where it strikes and size will not necessarily matter.
It will become clear only with hindsight which companies were best prepared and which sectors may be more resilient than others. For many, there will have been nothing that they could have done.
For those who are forecasting a V-shaped recovery, well, I hope vehemently that you’re right, but I can’t see it. The global economy is on lockdown and there will be varying ways in which different areas emerge.
One thing appears to garner agreement though. It will be dangerous to relax restrictions too quickly for fear of inviting a second wave of who knows what proportions? Sadly, the global economy is not like Snow White who has eaten a dodgy apple and can be awoken with a single kiss. The Wicked Corona Monster has cast a deeper spell than that. And so a gradual return to some semblance of normality appears to be the only obvious alternative.
We’ve only recently had the Virtual Grand National and I see parallels with that (bear with me). Before the race, a number of experts are asked for their tips and most appear to make perfect sense. For those who have not yet made their selections they may choose to follow the advice of their favoured tipsters. Many would have already made their own minds up and will bask in the wisdom of those tipsters who have put forward selections that agree with our own calculations. That’s called confirmation bias. We may even scoff at those with opposing views.
One thing is for sure though. As the race unfolds, punter and tipster alike are left scratching their heads and licking their wounds as one after another of the participants calls it a day either forcibly or voluntarily. Of course, a number will make it to the end and one will emerge victorious. And we all look to the sage that tipped it and wonder whether luck or expert judgement was responsible depending upon how we personally fared.
The world is in its own Grand National right now. We’ve only jumped a few fences as yet and already there have been some early corporate casualties. We’ve a long way to go. Indeed, we probably have not even gone over Becher’s Brook on the first circuit yet and have well over another circuit to go, negotiating numerous challenging obstacles as well as the Chair and the Canal Turn in the process. To reach the end you will need stamina, good luck and a close partnership between mount and jockey. All of these factors will become apparent as events unfold.
So how are we making our decisions for our mount, the 8AM Focussed fund? Again, simplicity helps. We’re simply looking at the world and trying to work out which sectors look the more likely to come out the other side intact, and possibly stronger.
So, we invest in artificial intelligence in the hope that it beats its natural rival, natural stupidity. The world has moved online and is requiring technology as never before to keep functioning.
We invest in robotics and automation, an increase in which will surely result from what we’re going through now. Robots don’t tend to go sick, but if they or our other systems come under attack then the cyber security specialists are called upon. So we invest in cyber security (or healthcare for robots).
We invest in healthcare for fairly obvious reasons, but there are new and interesting strands around biotechnology and innovation in medical devices that will probably emerge with more funding, and thus potential, post crisis.
As the world has moved online so we have invested in e-commerce, particularly in the emerging markets, as opportunities are seen and taken.
And with so many of the world’s population being kept indoors, and with universities across the globe being shut down, we are guessing that not everyone is simply sitting indoors looking at the walls. A relatively new and under-researched area is gaming and e-sports, and we are invested in one of the few ETFs that focuses upon this niche market.
And whatever the future holds, there will be a future, so we invest in a fund that searches for the trends of the future.
And that’s it really. We practice social distancing within our fund at present by keeping a distance between our equity holdings and non-equity holdings such as gold, cash, currencies and ultra short-dated bonds.
We don’t claim to know any more than anyone else about where the world is headed and what lies in store. Like everyone else, we hope that we come out of this nightmare as unscathed as possible and wish everyone else well. If we can lose as little of our capital along the way and set ourselves up for recovery when it comes then we would have done so to the best of our ability, and hopefully our investors (including ourselves) will look back with some satisfaction on this most difficult of times.
Andy Merricks is co-manager of the 8AM Focussed fund and a freelance fund consultant and strategist. The views expressed above are his own and should not be taken as investment advice.