Light at the end of the Covid-19 TunnelBy Les Nemethy, former World Banker, CEO Euro-Phoenix Financial Advisors Ltd.

The past week has seen two dramatic vaccine announcements—by Pfizer and Moderna—each claiming over 90% efficacy. This is good news. Some have called it the beginning of the end of the covid pandemic.

In this article I try to look at what this means for company owners and investors, with greater granularity. The vaccines do not constitute an immediate magic bullet, (a) because of challenges in roll-out, and (b) because economic and financial damage has already been done and will continue to be done until vaccine kicks in, and the virus will be outlived by its economic and financial effects.

(a) Challenges in roll-out

It will still be many months before these vaccines have any effect:
  • It is noteworthy that the two vaccine announcements were based on preliminary results. That means that there are still some regulatory hurdles to be crossed, in terms of obtaining final results and obtaining the relevant regulatory approvals. Pfizer, for example, has not released data on efficacy on various age groups.
  • More than thirty percent of people may refuse to take the vaccine, due to possible side effects, or based on religious or ethical considerations. I expect a lively debate to emerge in this area, as more details on the vaccines emerge. Concerns are beginning to emerge that the vaccination could cause Antibody-Dependent Enhancement (ADE), where the ability of the virus to enter your body is actually enhanced by the vaccine, resulting in even more severe illness1.
  • Then there are nightmarish logistic hurdles to be crossed—of manufacturing and distributing billions of doses—that must be stored at seventy degrees below zero in the case of the Pfizer vaccine, and twenty below zero for the Moderna vaccine. Not even the most advanced hospitals like Mayo Clinic have the capacity to store vaccines at -70 celsius.
Optimistically, it will be Q2 or Q3 2021 before the vaccines will start making an impact. While there may be a light at the end of the tunnel—it is still a long and dark tunnel. Until then, we will have a winter of exponential expansion of the virus, massive levels of sickness, suffering, and death in North America, Europe, and other parts of the world.

(b) Economic and financial effects outliving the virus

Although we may have some kind of visibility on the epidemiological curve improving in Q2 or Q3 next year, I will argue that we have less visibility on the curve for economic performance and financial markets. On medieval maps, at the edge of the explored world, cartographers would write “tierra de leones” (land of lions). Any forecaster who tells you what to expect in terms of GDP or financial markets for 2021 is at best making an educated guess. We are into “tierra de leones.”

Why this high degree of uncertainty? The following list is not exhaustive, nor in order of importance:
  • uncertainty as to timing of fiscal relief—in the US due to uncertain handover of power, in Europe due to the recent veto of the EU relief plan
  • possible civil unrest of unprecedented proportions from lockdowns, or in the US, related to transfer of power.
  • US-Sino conflict still playing out
  • as businesses and individuals use up their financial reserves, there may be rapidly escalating numbers of bankruptcies.
  • these in turn may trigger bank defaults. Potential bank exposure to CDO’s and derivatives remains opaque. Societe Generale, for example has the lowest Price to Tangible Book Value ratio of any bank in Europe, at 17%.
  • a dollar crisis may be triggered by international investors dumping treasury bonds.
Even though the pandemic may begin receding in Q2 or Q3, economic and financial“surprises” may manifest themselves well thereafter, as bankruptcies, etc. take time to work their way through the system.

There are, however, a few things that might be predicted with some degree of confidence. Governments and Central Banks will continue massive amounts of fiscal and monetary stimulus — globally there has been USD 19 trillion of covid relief to date2 – and still going strong. Debt will continue to soar, money supply will continue to balloon.

Assuming the aforementioned scenario, what advice to business owners and investors?
  • This is not a sellers market for mergers and acquisitions: unless you have a company that is a ‘winner’ from Covid-19, or you are in a rush to sell a company even on a “distress” basis—it best to wait until at least Q2 before putting your company on the market. (You could, however, use the time to improve your company and prepare it for an eventual sale).
  • To help survive the upcoming tough winter, ensure you have sufficient liquidity, both at the personal and corporate level.
  • I continue to believe in gold (up to 5% of your portfolio) as an excellent hedge. While there will of course be price fluctuations, in this environment of massive fiscal and monetary stimulus, over the long-term gold appear to have much more upside than downside.
The international political, economic and financial order is under unprecedented stress. Systems under stress are likely to produce surprises. Be prepared for the unexpected!

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