In Part I, we had looked at the 5 fundamental human behaviors shaping the response against the Corona Virus and influencing the outcome. In this part we attempt the art of soothsaying. As we peer into the crystal ball and look at the future, we must note crystal ball gazing is prone to risks.
1. Fear Vs. Hope
Fear is a basic human instinct and so is hope. Most investors are long only and bull runs last longer than bear stampedes. We need whole departments of risk guys to think about the negatives and prevent our hopefulness from doing long term damage. Risk departments weigh recent experience heavily, ensuring no crises repeats itself immediately thereafter.
i. As the supply is ramped up, the FOMO (Fear of Missing Out) syndrome will die out and so will the fear induced hoarding response
ii. Most OECD countries are yet to peak in terms of mortality and as significant global market investment is controlled out of these countries, the fear is likely to prevent major resurgence in the market immediately.
iii. However once multiple countries, we identify with (key word), are able to flatten the curves, we will get the necessary "hope". A return of hope is sufficient to result in market resurgence before peaking of cases in all countries. US and UK remain critical, partly owing to the dominance of the English media and New York & London as finance hubs
iv. As old investment themes die out, new themes emerge. As risk managers learn lessons from the recent crises, leverage, cash reserves & business continuity planning shall emerge as a key risk focus area. The flight to quality will continue. At the same time, money will flow into the new themes thrown open by the crises viz. ESG investing & distressed asset investing
Data snippet: Refer S&P 500 90 year historical chart & note the time taken by the bear stampedes and the bull runs. If you are a long term investor this holds some lessons. 2. Change in Habits and Consumer / Business behavior
As discussed in the previous post, a change in habit is driven by a habit loop of positive and negative reinforcements to the new habit and related triggers.
i. Impact of prolonged negative reinforcements - A deep crises would result in a deeper impact on risk averse behavior of consumers / investors. The basket of goods and services consumed could shrink substantially (esp. with lock-downs longer than 3 months). E.g. consumption on vacations abroad, dining out, luxury products, etc could be reduced and focus on hygiene and health may be here to stay
ii. Change in behavior - In situations where habits were forced to be changed, however if the new habit has surprising rewards, the change in behavior could be long lasting. The key here is business latching on to the opportunity to make the new experience positive. E.g. acceleration of movement towards eCommerce, Work from Home, Digital Education, Branch Less Banking, Telemedicine
iii. Pent up demand - Consumption has been a release for us and while one may delay it, a return to normalcy could see significant pent up demand e.g.. apparels (return to work / school), furniture & fixtures, home decor (all that time staring up at the cracks), etc. The benefits of cleaner air during the consumption de-addiction isolation is unlikely to stay as corporates, governments and central banks get back to pushing us to spend (& earn).
Pt ii & pt iii ensure that bulk of the velocity of money is likely to be restored as the crises abates. With recent liquidity infusion measures in place, a sudden surge in consumption and asset inflation cannot be ruled out. In terms of formulae this multiplier would be reduced by the consumption of those that continue to remain unemployed and part of the discretionary consumption.
Data snippet: Refer: Retail Sales history Decline in spending is probable with unemployment at an all time high but eventually we will out do previous highs. What we consume may however change.
3. The more things change, the more they remain the same, or Do they?
This adage refers to the longevity in mass human behavior and the difficulty in reshaping it. It is however also true that cataclysmic global events such as the World War II, the nuclear explosions in Japan, etc. have led to long lasting changes in human behavior of those impacted (key word!). In India the sudden emergence of the bubonic plague in Surat in 1994 transformed the city from one of the dirtiest, to one of the cleanest.
Physiological needs are the base of Maslow's hierarchy of needs and political fortunes will be decided on this count.
i. Healthcare spends & budgets - healthcare spends shall go up globally for good. Even the most developed countries have been proven to be woefully under invested in healthcare. As a corollary other spending segments (social/ defense) shall take a hit & higher taxes for the rich are inevitable. Perhaps what is more important to consider is the effectiveness of the spend, increased generic drug usage & telemedicine
ii. Fiscal profligacy to stay - As the Eurozone considers issuing euro bonds to take care of the unforeseen spending, voters and politicians question the merits of fiscal discipline. This year will see probably the greatest increase in poverty globally for millions on the margins. Universal Basic Income or some form of it for the marginal sections of the society would be dangled to tempt voters.
iii. Surveillance & new crises management structures - Government presence at the grass roots both for boots on the ground and digital has proven to be critical. This brings negotiating capital for sharing of data. We share tremendous amount of data with private service providers and do this not out of coercion but because we get something in return for free. Governments may do the same or legislate control of such data in case of a crises. The transition is likely to be voluntary and creeping. Centralized control and delivery systems for such crises will also be put in place
At the same time certain things will remain the same…
i. Efficiencies will need to be squeezed to maintain margins and digitization, AI/ML, automation will continue to pick up pace
ii. Unemployment in old economy sectors may stay at elevated levels; large corporations will continue to outpace smaller incumbents
iii. Us vs. Them themes will continue to rule political discourse as millions are unemployed and the enthusiasm of the war give way to cold ledger reviews
iv. We will continue to put our money in banks, consume food, clothing, shelter, internet & soaps
Data snippet - Per capita health care spends in USD (2016) & life expectancy (2016) - USA -$9870 / 79 yrs, Canada $4,458 / 82 yrs, Italy $2,739 / 83 years, Singapore $2,462 / 83 yrs, South Korea $2,044 / 83 years, China $348 / 76 yrs, India $63 / 69 yrs. Some countries clearly get more bang for their buck (Source: Macro Trends)
4. Collaboration and Balkanisation
World War II resulted in the formulation of the United Nations. What will this crisis result in? Increase collaboration within countries or balkanise the world?
Fear has resulted in hoarding behavior not just by individuals but also by nations. Manufacturing capacities of test kits, Personal Protective Equipment (PPE) and medicines have proven to be a handy tool to increase clout & maintain goodwill. Lack of health data transparency, ineffectiveness of the World Health Organisation (WHO), fiscal profligacy, supply chain concentration & redundancies raise questions that involve a collaboration or balkanisation response. Matters of life and death create strong memory imprints and many friendships are being tested as we speak.
The instinct to balkanise stems from the same Us vs. Them response discussed in the first article. However, collaboration requires much more than empathy. It requires leadership and benefits/ need of such collaboration to have been felt in a small measure during the crises.
Collaboration
i. New global treaties and standard operating procedures for data disclosure are inevitable. Countries that do not sign up and deliver may see rising travel restrictions or mandatory health checkups for travelers
ii. Global cooperation in sharing of critical information to boost new drug discovery may find a more organised structure. We are likely to see increased spends to develop vaccines in advance for similar potential viruses and develop inventories
iii. Doctors & scientists across the world have shared data on treatment efficacy and designs for medical equipment and PPE for a faster response. A more formalized platform for this may emerge
Balkanisation:
i. Crises buffer stocks will be built up by countries for critical medicines, medical equipment and PPE
ii. Manufacturing redundancies will be created by diversifying sources and localizing manufacturing. A blend of protectionism and diversification of critical suppliers will play out
iii. As merits of fiscal conservatism are questioned, the EU may find that the Brexit is not the only potential exit
If you reached the end of this longish article, I must provide one final prediction - many new books and research are to follow in the coming years from the unprecedented data thrown up by the lockdowns. The world is right now a test tube.
What do humans deem most essential and critical? How does nature respond when we withdraw and by how much do emissions drop? Will people cooperate and give up liberties if a similar response is required by climate change and not immediate threat to life? Does productivity drop or rise with WFH?
Academicians will pore over many such questions over the coming decade. Authors Note: Logical data driven decision making should see us increase globalization to reduce cost of healthcare, increase collaboration to deal with such crises, shift from consumption based growth to sustainability based. Human behavior however tells us we don't always follow logic, at least not completely.
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