Covid-19 – Liquidity preference

The biggest risk is a credit crunch.

• For the next few months, cash is going to be the single most important factor as only cash will allow affected businesses to survive the very sharp (but temporary) decline in their revenues.
• The knock-on effect of a wave of loan defaults and bankruptcies could be very serious as Western economies are more indebted now than they have ever been, (more than 2008) with very little put aside for a rainy day.
• It is not just raining now, it is a torrential downpour meaning that the effort to prevent economic collapse has to be focused on the small businesses most affected by the lockdown as raining cheap money on consumers is not going to help in any way at all.
• This is because consumers are at home and they will not be going anywhere except to the supermarket or the pharmacy for a couple of months.
• What these consumers need is to know that their employers will still be paying their salaries despite the massive decline in their revenues and it is here where the economic support needs to be focused.
• It is the fear of a global credit crunch combined with the uncertainty that the outbreak represents that is really driving the market as safe havens such as gold are also suffering because everyone is rushing to raise cash.
• In this environment, it is the heavily indebted industries that are most at risk which is why large capitalisation technology companies will fare far better than most.
• Headlines like those coming from SAS Airlines which is temporarily laying off 10,000 or 90% of its workforce must be avoided wherever possible as they will instil great fear in the public.
• Most of large tech is still running significant net cash positions meaning that it is in a position to support its employees and operations without having to make layoffs or close down operations permanently.
• Hence, I suspect that as the market whipsaws around, it is the shares of these companies that will move the least.
• While Google, Facebook etc. were relatively isolated from Covid-19 when it was a China demand and supply chain problem, they are going to take a hit now.
• This is because with consumers at home and not spending anything, there is not much point advertising any products.
• One only had to listen to the radio in the UK for evidence of this as all of the advertisements still running for events or places that will soon be closed or products no one is going to buy while the country is on a war footing.
• That being said the hit to large tech is likely to be most felt in the consumer electronics sphere with a knock-on effect to semiconductors.
• Two potential exceptions to this are Logitech and Plantronics who may stand to benefit as educational establishments and home workers realise how bad the webcams and speakers on their laptops are and make an upgrade.
• 7 years of remote working has clearly demonstrated how much cheap cameras and speakers can improve the quality of the interaction and so I would not be surprised to see a spike in demand over the next few months.
• Both of these stocks have suffered during the sell-off and may benefit as the great distance learning and home working experiment gets into full swing.
• That being said, I am steering clear of all equities for the time being as there is very little rhyme or reason to the way anything is trading at the moment meaning that everything is very high risk.
• I am sticking with cash and gold.