How Investors Are Weathering the Corona Storm
There is no doubt that over the past two years, since the global Covid crisis began, the world has changed and may never be the same again.
Many aspects of our daily lives have been altered, and national economies around the globe are no different. The unrelenting issues which surround us have caused a global recession just a decade after we started to crawl out from the last one.
An Atmosphere of Uncertainty
The investment industry, like all things, lives in an atmosphere of uncertainty in many cases — and uncertainty can have serious consequences when it comes to investment.
Now, two years since we first all heard the term “Covid,” the future is still unclear, and we need to ensure that we are able to adapt and abate this uncertainty as best we can. Investment does indeed continue and has in fact reached record highs this past year. According to data collated from Refinitiv as reported by Reuters in July, venture capitals invested over nearly $270 billion in the first two quarters of 2021 — more than $17 billion in comparison to the previous year.
What Is Having an Impact?
Meanwhile central banks across each continent have been making large injections into financial assets — reportedly, up to $9 trillion, which is nearly five times as much as the $2 trillion used during the 2008–09 crisis. This is just one factor that is being evaluated when considering why the economy, and in turn the investment industry, is being affected so dramatically — whether for the better or for worse.
Lockdown policies and national restrictions, and the timeframes at which they occur, have a huge impact on a number of industries, as do disruptions in trade-flow and freight capabilities. Low interest rates and government stimulus programs must be taken into account while geopolitical disputes cannot be ignored by investors considering the potential effect on their portfolios. These factors need to constantly be reevaluated and revalued when considering portfolio navigation, taking into account regionality, sectors, and other external variants.
Industries in Turmoil
Some of the worst affected industries to feel the impact of the pandemic are undoubtedly oil and gas drilling, leisure, hospitality, and of course travel. The airline industry has been consistently inconsistent. The small recovery at the beginning of 2021 was made null and void and plummeted due to national lockdowns, vaccination programs, and third, fourth, and possible fifth “waves” of Covid-19 variants.
Foreign investment has decreased considerably, especially in developing countries. According to data from the UNCTAD (UN Conference on Trade and Development), developing countries are facing the brunt of the pandemic with FDI (Foreign Direct Investment) plunging in 2020 by 35%. This does seem to have started to rise again this year but is yet to make a significant recovery.
Blossoming in the Darkest of Times
Conversely, there have been industries which have managed to blossom during this period. Some may say that this is to be expected. NYU Stern School of Business Professor and digital transformation researcher Arun Sundararajan noted that “crisis can be… a catalyst or can speed up changes that are on the way — it almost can serve as an accelerant.” This is most certainly the case when it comes to the acceleration of global automation and digitization.
Many subsectors of the technology world have thrived. Investors have been looking more into a product’s high-tech capabilities and specifications, considering low-to-zero-touch operational models, real-time tracking, and traceability. Start-ups became a solid addition to the portfolios of many investors with fintech, biotech, and ecommerce becoming a popular avenue, as were software products and digital healthcare. In fact, healthcare in general is potentially a safe bet.
Consideration for the New Normal
As a private equity or venture capital firm, it is most certainly time to think about your own portfolio and business model, but more than that, to start considering the business models of the companies within your portfolio. Do their business models have mobility with the possibility of change according to government policy and the current economic environment? Can they shift as seamlessly as possible to meet the moves in consumer preference?
Many private equity firms and venture capitalists are now implementing alternative strategies. Some are readjusting their portfolios with future growth in mind, and some are making significant cost cuts within their current companies, while others are hibernating their businesses.
Arguably, the best bets in this new climate and this new age are not only the aforementioned emerging markets but the more sustainable investments for a post-pandemic market, as opposed to the more ephemeral choices, which may not withstand a fluid economy. Many surmise that in this environment, long-term survivors are more important than short-term winners.
Time to Rebalance
Investors are looking to rebalance their portfolios and defuse unnecessary risks associated with potentially volatile markets. Perhaps now is the time to ensure that there is sufficient diversification across a variety of regions and spanning multiple sectors.
Due diligence has of course always been an important part of investment and now more than ever. Checking for bailouts and discrepancies before moving forward has never been more important. Volatility within markets is unfortunately part of our new reality, and if we learned anything from the 2008–09 crisis, it is that some markets take a long time to recover — and some never do. It is vital to create a portfolio across asset classes that matches both your risk tolerance and investment volatility.
We can weather this storm. We just have to remember to do our homework. It is time to realize that, in the end, there may be more survivors than winners.