The COVID-19 Crisis – The Inside Word From Goldman Sachs

COVID-19 – The Reality

There is plenty of blatant fearmongering right now, be that from the media or from individuals. It has struck the heart of the business world, causing convulsions of panic selling to overwhelm international markets. Investors have seemingly lost their bottle, but that is hardly surprising when the ‘news media’ constitutes clueless, dramatic speculation, rather than cold, hard evidence. I recently penned a different article about COVID-19 that you may be interested in reading.

Investors need to cut through the misinformation that is currently thriving and hear what the big business institutions are actually saying. Who better to hear from than Wall Street powerhouse, Goldman Sachs Group?

In an emergency conference call on Sunday 15th March, Goldman cut through the palpable anxiety and explained the fundamentals of the COVID-19 situation in a pragmatic way to 1500 of its clients.

The Goldman Sachs logo on a wooden wall.

Even the most logical investors do not have their heads in the sand. This is a serious, worrying situation that will take thousands of lives. However, let’s hear how the market is reacting beyond sentiment. It would be ignorant and insensitive to have a ‘good’ and ‘bad’ category for the impact of COVID-19 on markets given the large number of deceased individuals. Let’s settle on reasons to be bearish, and reasons to be more bullish.

Bearish (1/2)

  • “50% of Americans will contract the virus (150m people) as it’s very communicable.”

This is an enormous number, and there is no getting away from the unavoidable impact that COVID-19 is going to have on investors and markets. The scale of the problem creates immense volatility and unpredictability. The scale of this number is likely one of the main drivers behind current investor sentiment.

Bullish (2/2)

  • “This is on a par with the common cold (Rhinovirus) of which there are about 200 strains and which the majority of Americans will get 2-4 per year.”

This puts the Coronavirus situation into perspective. While nobody is pretending this is a normal flu situation, it is important for investors to avoid getting carried away. For the vast, vast majority of people, COVID-19 will exhibit either moderate or no symptoms. The elderly population and those with pre-existing conditions, especially respiratory, are at an increased risk, and this needs to be a constant consideration. However, let’s all calm down and take a breath before unnecessarily panicking.

Bearish

  • “70% of Germany will contract it (58M people). This is the next most relevant industrial economy to be affected.”

This is an even more intimidating number than the figure for the U.S and is likely generated by the greater population density in Germany. The German economy is integral to international trade, especially the automotive industry. One of the most important global economies possibly descending into paralysis is a very persuasive factor behind the mass panic selling.

Bearish

  • “Peak-virus is expected over the next eight weeks, declining thereafter.”

Investors will be seriously considering why they should invest now in these unprecedented market conditions, rather than waiting several months to global markets to begin to recover and stabilise. The extended timescale of the virus makes a strong case of caution.

Bearish/Bullish

It Depends On The Geographical Location Of Your Investments!

  • “The virus appears to be concentrated in a band between 30-50 degrees north latitude, meaning that like the common cold and flu, it prefers cold weather.”          

If you are investing in mining companies that are listed on an exchange that either finds itself in the cold season, or operates in an environment that is currently wintry/cold year-round, investors should make this a consideration. The virus appears to flourish in colder environments, so it is likely that environment will play a large factor in national economic performance.

COVID-19 on a cell level.

The coming summer in the northern hemisphere should help. The virus is regarded by many experts as seasonal. Investors like myself are interested in the climate logistics: does this mean a gold mine in what is currently and usually a very hot country, such as in Northern and Central Africa, is a safer, more predictable investment than one in Canada?

Bullish

  • “Of those impacted 80% will be early-stage, 15% mid-stage and 5% critical-stage. Early-stage symptoms are like the common cold and mid-stage symptoms are like the flu; these are stay at home for two weeks and rest. 5% will be critical and highly weighted towards the elderly.”

While this is devastating news, investors will hopefully be able to process these statistics for what they are. The majority of the workforce should be either unaffected or mildly affected. It is incredibly sad that the elderly people are suffering by far the worst, but investors will be aware that elderly individuals do not comprise a huge portion of the mining workforce. The lives of older people do not matter any less; that goes without saying. However, the logistics of this situation are clear.

Bullish

  • “Mortality rate on average of up to 2%, heavily weighted towards the elderly and immunocompromised; meaning up to 3m people (150m*.02).”

The mortality rate is a shocking figure but is relatively low. In addition, the mortality rate is based on total confirmed cases, when the true number may be much higher (but let’s not speculate). Again, the mortality rate is weighted towards the elderly, who play a reduced role in the world of mining and wider business.

Bullish (1/2)

  • “In the US about 3M/year die, mostly due to old age and disease, those two being highly correlated (as a percent very few from accidents). There will be significant overlap, so this does not mean 3M new deaths from the virus, it means elderly people dying sooner due to respiratory issues.”

This further confirms the COVID-19 situation. COVID-19 is not usually the sole cause behind an individual’s demise. It often hastens the death of those already suffering from severe health conditions. That is not to say that all those suffering from these underlying conditions are usually in any mortal danger on a day-to-day basis.

Bearish (2/2)

  • “This may however stress the healthcare system.”

An overworked, possibly overwhelmed healthcare system is rarely an indicator of economic prosperity.

Bearish/Bullish

  • “There is a debate as to how to address the virus pre-vaccine. The US is tending towards quarantine. The UK is tending towards allowing it to spread so that the population can develop natural immunity. Quarantine is likely to be ineffective and result in significant economic damage but will slow        the rate of transmission giving the healthcare system more time to deal with the caseload.”

How well your national economy is preserved depends on the competence of your government, the effectiveness of their coping strategy, and the actions of the populace. If Goldman Sachs is right on the ineffective nature of quarantine, which has perhaps been demonstrated by the situation in Italy, western investors seem to have a big reason to be concerned.

NYSE workers look stressed while talking over a headset.

A lack of national trust in the polarising Donald Trump and Boris Johnson could reduce the confidence of investors in their COVID-19 strategy, creating more volatility and leading to citizens refusing to heed advice. This could cause further deterioration to the situation.

Let’s hope the U.S and UK electorates have elected the right people for the job.

Bearish/Bullish

  • “China’s economy has been largely impacted which has affected raw materials and the global supply chain. It may take up to six months for it to recover.”

China’s economy is crucial to world economic health. The world relies on China for a huge amount of manufacturing. Disruption to the supply chain will create global uncertainty and this looks to be for an extended time period. This likely means more investors will be keen to sell and remain passive.

However, western investors will be hoping China’s economic frailties can be capitalised on by western businesses. Will western businesses be able to position themselves more strongly? Most of how this plays how depends on a company’s ability to mitigate losses from supply chain and demand disruption, in addition to ability of national governments to deal with this situation appropriately. This is far from a predictable outcome.

Bearish

  • “Global GDP growth rate will be the lowest in 30 years at around 2%. S&P 500 will see a negative growth rate of -15% to -20% for 2020 overall.”

Even the most ardent of contrarians will be aware this is likely to destroy investor sentiment for the foreseeable future and have a negative impact on growth.

Bearish/Bullish

  • “There will be economic damage from the virus itself, but the real damage is driven mostly by market psychology. Viruses have been with us forever. Stock markets should fully recover in the 2nd half of the year.”

This is encouraging for investors because, if Goldman Sachs is to be believed, it shows that markets should fully recover from the impact of COVID-19 by 2H/20. However, the impact on investor sentiment/market psychology will be much more long-lasting, insidious and damaging. 

Bearish/Bullish

  • “In the past week there has been a conflating of the impact of the virus with the developing oil price war between USA and Russia. While reduced energy prices are generally good for industrial economies, the US is now a large energy exporter, so there has been a negative impact on the valuation of the domestic energy sector. This will continue for some time as the Russians are attempting to economically squeeze the American shale producers and the Saudi’s are caught in the middle and do not want to further cede market share to Russia or the US.”

Whether this is a positive or negative for you depends entirely on which side of the investment aisle you are stood. Investors perhaps need to decide how they feel this geopolitical situation will develop and may need to adjust their position depending on their degree of confidence in their predicted outcome.

Bullish

  • “Technically the market generally has been looking for a reason to reset after the longest bull market in history.”

If Goldman Sachs is right, COVID-19 could have taken the form of any other catalyst. The message appears to be that this market reset was inevitable, but even optimistic investors will acknowledge the current market situation is far from routine or intentional.

Bullish

  • There is NO systemic risk. No one is even talking about that. Governments are intervening in the markets to stabilize them, and the private banking sector is very well capitalized. It feels more like ​9/11 than it does like 2008.

This is a very significant point. If Goldman Sachs it to be believed, the ferocity of the panic of investors is not fundamentally justified. There are obvious reasons for caution, but the risk appears more temporary than previous economic crashes, and the idea that markets are in dire straits appears to be exaggerated.

After reading this, I hope investors can at least feel more informed about the COVID-19 situation. I hope this article has brought some balance to the discussion, and investors now need to continue to go digital, research, and make their own minds up.

There are significant obstacles for us to overcome. However, this is no reason for people to switch off from investment entirely. Volatility brings risk, but it also brings opportunity. This situation will not last forever. In the meantime, take advantage of your free time at home as my country of residence, the U.K, edges towards what looks like an inevitable total lockdown.

Things will likely get worse before they get better. Stay safe, take care, and be selfless.

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

A crowd of people wearing masks on a busy public street.

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