Beyond COVID-19: Through the rearview mirror

Have you ever given much thought to the saying ‘the more things change, the more they remain the same?’ or ‘history repeats itself’?

As the world grapples with COVID-19 and it increasingly seems hard to look past lockdown, these popular phrases began to ring in my head.

How would markets turnout after COVID-19? To figure this out, we go back (2008/2009 financial crisis), way back in time (1918 Spanish flu) to understand how these events shaped the economy and markets and what learnings we can draw from them to position beyond COVID-19.

Watch out! There is always calm after every storm

To get a sense of life in the aftermath of COVID-19, we must look at history to see how the world economy turned out after the last recorded pandemic. The 1918 Spanish Flu pandemic (which ended in 1920) is estimated to have affected 500 million people, one-third of the world’s population at that time, leading to at least 50 million deaths worldwide.

The global economy suffered steep decline over this period with significant impact on demand and supply. In the years after the Spanish Flu, the US which was one of the most affected countries by the pandemic, experienced its strongest growth of 42 percent in the 1920s decade and US stocks delivered on average 21 percent return between 1920 and 1928.

Historical returns: Dow Jones Industrial Average
Source: Bloomberg

Fast forward to 2008/2009 when the world economy experienced its last recession occasioned by weak financial systems, we observed that global output equally had a V-shaped recovery which culminated into a decade of decent growth were global GDP averaged 3.8% growth per annum.

Post-2008/2009 economic recovery was driven by large stimulus packages by fiscal and monetary authorities worldwide; like how the response to COVID-19 has been. These stimulus packages which include tax breaks, low interest rates and cash transfers will not only help companies and households wade through the crisis, but also form the bedrock for a strong rebound in demand and output and eventually, economic growth.

Although COVID-19 may not reach the proportions of the Spanish Flu, we can draw parallels such as isolations, restriction of travel, lockdowns and economic impact between the two events. This suggests that while the global economy may face its deepest decline (possibly worse than that of the 2008 financial crisis) due to COVID-19, the recovery could be very strong. As such, we expect to see a sharp V-shaped curve for global GDP growth.

Nigeria was able to go through the 2008/2009 crisis because coming into that year, the then Obasanjo-led government had built healthy FX reserves over USD60 billion. The country still managed to grow 6.7% and 8% in 2008 and 2009.

With reserves at almost half the 2008 figure today, it is unlikely the outcome would be as resilient as that of 2008/2009.

Winners and Losers

Every economic cycle leaves its casualties, but at the same time births new champions. From a country level, China was arguably the biggest beneficiary of the post-2008 crisis recovery, adding $14 trillion in economic growth between 2007 and 2017.

Can you see Nigeria ranking 15th in that list of top twenty economies that added the most value between 2007 and 2017?

How times have passed. While we cannot attempt to forecast economic growth of various countries after COVID-19, from simple understanding of trends, one can easily tell what sectors would emerge as winners and losers in the post COVID-19 world.

Your guess is as good as ours. Healthcare, food, logistics, storage and Information & Communications Technology (ICT) rank as some of the biggest winners. We are certain countries will pay bigger attention to their healthcare sectors from here on.

This portends an alluring opportunity in Nigeria where the healthcare system needs a significant upgrade.

Zoom, zoom, zoom, zoom, zoom, zoom, zoom!

Six months ago, very few people knew what Zoom was or even thought the Microsoft suit had a solution called Teams. Today, everyone is on Zoom or Teams. Virtual meetings are the order of the day.

However, many local internet solutions still run on snail speed and provide a constraint. Sizeable investments would be required to improve user experience across the ICT value chain.

Can you think through how different sectors will emerge post COVID-19?

The markets: Saddle your horses, bring out your shovels…its time to go treasure hunting

Financial markets are what we call leading indicators in any economy – meaning most times they signal likely future economic direction. Thus, when the stock market begins to show sustained uptrend, it is in most cases an expectation of improvement in the economy. The key words here are ‘sustained uptrend’!

Don’t let a few days of the Nigerian Stock Exchange (NSE) bounce fool you.

We may have yet a while to go before the COVID-19 coast clears. Looking at the stock market, it then goes without saying that the current environment does present a rare opportunity to acquire assets for cheap and build great wealth for long term and patient capital.

From the chart below, you will observe that the market is back to 2012 levels! For anyone with long term investible funds, we say look beyond the current crisis and follow the trends – there may be gold in the dirt, diamonds in the rough.

Source: Nigerian Stock Exchange

Which way yields?

What about the fixed income market, you would ask? What is the interest rate direction?

From a monetary perspective, Nigeria finds herself in uncharted territory today. The combination of low oil prices, constrained government finances, record fiscal deficit, thin FX buffers, a depreciating currency and rising inflation suggest that the economics are ripe for interest rates to really climb. This is because government will need to borrow more to finance a N5trillion deficit projected in the revised 2020 budget. However, the Federal Government and Central Bank of Nigeria (CBN) have skillfully adopted unorthodox policies to keep market interest rates low in recent times.

But for how long? The revised 2020 budget did not provide clarity in terms of domestic borrowing but what we can see is that a large build-up of liquidity held by non-bank financials amidst a thin supply of investible outlets (after CBN banned domestic investors from the OMO market) in the domestic markets, suggests interest rates are unlikely to climb much higher in the near term.

Furthermore, we are currently in an economic crisis that will require a lot of stimulus by the fiscal and monetary authorities to help prop up the economy. Such efforts are best accompanied by a low interest rate regime.

Will the economics prevail over unorthodox policies? We’ll let you be the judge of that.

In concluding, we make bold to say the post COVID-19 world will birth some new ways of doing business, new opportunities and new challenges, but remember that the more things change, the more they remain the same and that history repeats itself. COVID-19 will come and go, economies will rise again.

They will count their losses, but economies will rise again.

Keep your eyes on the ball; this too shall pass!