The coronavirus has taken over the world. One glimmer of hope is that, at least in some European countries, the increase in the number of new infections is slowing down slightly. Meanwhile, doctors around the world are searching for an effective remedy against the virus or are researching already approved medications. Aside from the medical aspects, political decision-makers and central bankers are doing everything in their power to take appropriate measures to counter the negative impact of the crisis. In this context, the attractiveness of equities as an asset class is by no means diminished, but instead tends to increase. This applies in particular to those companies that have suffered disproportionately from the sell-off.
It is not only in Germany that the coronavirus is crippling public life. In addition to personal restrictions, the protective measures are impacting the economy to an unprecedented extent. Companies have introduced reduced working hours; businesses are on the verge of insolvency. The measures introduced to restrict the rampant spread of the virus have hit society and the economy equally hard. Recently released economic forecasts now appear to be to be a waste of paper. In short, the situation represents uncharted territory for all those involved.
The corona crisis is not comparable with the 2008 financial crisis / concerted action by central banks and politicians
Meanwhile, a comparison is currently being made time and time again. How does the corona crisis compare to the global financial and economic crisis of more than 10 years ago? A closer look reveals that this analogy is not correct. This time, the financial market crash came fast and hard. As everything plummeted so rapidly and this sell-off spread across all asset classes, predictions of the spectre of a (global) recession were making the rounds. And rightly so. This was an unimaginable sell-off. So how did politicians and central bankers react?
The decision-makers are well aware of the seriousness of the situation. This uncharted territory requires committed, joint action. There appears to be global agreement on this, and the first ground-breaking steps to revive the economy have long since been taken. This should prevent an even greater firestorm. The central banks are providing funds to maintain the liquidity of the financial system. The EU Commission, for example, is providing a total of EUR 37 billion in liquidity aid for the member states with its "Coronavirus Response Investment Initiative" under the EU Structural Fund. The European Investment Bank has launched a package of measures and the EU Solidarity Fund was mobilised in the wake of the crisis. In short, the central banks (and political decision-makers) now have their moment in the sun. Never before have these sums been raised in such a short time in all countries - to provide companies and businesses with the necessary bridging loans and to help citizens in a largely non-bureaucratic manner. Of course, and this is the other side of the coin, so to speak, these economic stimulus packages are driving government deficits to new highs. And a normalisation of the interest rate landscape, which was still being debated recently, is probably unlikely in the wake of the necessary measures that have been introduced. This, in turn, this presents equities in a new light as attractive asset class.
Equities as the winners in the crisis
Although the current economic data is disastrous and the slowdown is likely to leave its mark for a considerable time (several quarters), it is important to look ahead. For investors, it is now particularly important to think and act with a long-term view. It is true that the stock markets have lost a significant amount of value in the wake of the pandemic triggered by the coronavirus. However, the combination of a gradual decline in the virus, in conjunction with the strong sell-off on the markets, should provide fresh impetus for hopes of rising prices in the medium to long term. Therefore, investors are well advised not to allow themselves to be further infected by the panic. On the contrary, for valuation reasons, it is advisable to essentially rediscover equities as an attractive and indispensable source of returns and not to miss the "right" time for reinvestment. Many shares have become victims of the coronavirus. Strong cyclical investors have been hit particularly hard. This could open up a number of opportunities for the future. Small and mid-caps, which have sometimes suffered greatly from indiscriminate selling, also offer selective opportunities. In addition, there are also sectors and segments that are profiting from the state of emergency, so to speak, and/or are recovering comparatively quickly. Of course, investors should look carefully and separate the wheat from the chaff. Those companies whose business model is established and well equipped for the future, and which have a solid balance sheet structure, are definitely worth more than a glance. Ideally, they will weather the storm and emerge stronger from the crisis. In short, equities are becoming even more attractive than bonds in the wake of the corona crisis.
Authors: Thomas Meier, Christos Sitounis, fund managers of MainFirst Global Dividend Stars and MainFirst Euro Value Stars