Eight lessons from previous crises that apply today

By: Robin Parbrook, Fund Manager, Schroders

Robin Parbrook, Fund Manager at Schroders
Robin Parbrook, Fund Manager at Schroders

Whilst the world is changing at a rapid pace, you can’t ignore the insights from the past. So, having been investing in Asia for nearly 30 years, what have I learnt from past crises and how could it affect investment decisions in Asian equities today?

Change your mindset.

This is not about just picking up your old favourite companies at fair value. During a crisis, you need to recheck the investment case completely given the structural changes in the environment. Scenarios must be rerun and fair values challenged and reset for new assumptions. Worst case scenarios need to be reassessed – investors should not just think outside the box but should often think the unthinkable.

Forget focussing on near-term profitability.

Instead, focus on the balance sheet and cash flows. Debt can be lethal in a crisis, even in small doses so the structure of debt including maturity, covenants and who are the company’s bankers are key. During the Asian Financial Crisis I saw many businesses go bankrupt – not because they didn’t have a sound business, but because some banks refused to roll credit lines.

Be wary of some bank shares.

Banks by their nature are the most leveraged businesses listed on stock markets. Leverage and a crisis don’t go well together. In addition, even for better banks, non-performing loans will come with a lag (as will the rights issues). As the Global Financial Crisis (GFC) and Asian Financial Crisis proved, with a few exceptions, weak banks tend to disappear/become zombies and even the better banks are slow to recover.

Countries with strong institutions tend to recover more quickly.

Good coherent government and a well run civil service will tend to mean confidence is restored faster and business can return to normality quicker. During the Asian Financial crisis it was Hong Kong, Taiwan, Australia, Singapore and Korea that recovered the quickest, whereas Indonesia, Malaysia, Thailand and the Philippines, almost collapsed completely.

Disruption accelerates during a crisis.

For investors, a crisis means we need to review all our investments as disruption accelerates. A crisis often allows out-of-the-box thinking to come to the fore and breaks down barriers to change. It can rapidly accelerate the process of creating winners and losers. We see this today amid the Covid-19 crisis, with massive disruption about to hit. Potentially this will include:

  • The end of 9-to-5 office working week and mass commuting
  • A structural move to working from home
  • Less business travel
  • Online healthcare
  • Online education
  • Automation and onshoring of production
  • A move to a much more virtual world

Zombies will rise.

In a crisis, governments will often intervene to stop markets clearing, especially in those sectors deemed “strategic”. This often leaves lots of zombie companies. This was the case for Korean shipbuilders, Thai property, Korean construction sector and most of corporate Malaysia post the Asian Financial Crisis. The lesson for investors is to avoid investment in sectors that don’t “clear” or haven’t been allowed to clear by governments.

Always buy a good business at a fair price.

When you have done your analysis and decided which businesses are likely to come out of a crisis stronger, don’t be overly greedy on the price you are willing to pay for it. The key is to not continually reduce your desired entry level if the share price gets to your initial target, unless the facts and the investment case have changed.

The impact of a crisis can linger for longer than you think.

After the GFC, the sluggishness of corporate investment, populism and a desire for less free market capitalism have all been permanent features. After the Asian Financial Crisis, an aversion to debt became permanently ingrained across much of corporate Asia. This should be positive for the Asian corporate sector during the current crisis. Asian corporates are more lowly geared than those in the West, so hopefully can weather the storms better.

But, because a crisis is structural it takes a lot longer for stock markets to recover than at other times. Stock markets remain vulnerable and investors twitchy, particularly if, as highlighted above, a crisis accelerates disruption, creating winners and losers. Investors shouldn’t feel the need to chase market rallies during a crisis, unless they believe the bulk of the crisis period has passed.

The views and opinions contained herein are those of the authors, or the individual to whom they are attributed, and may not necessarily represent views expressed or reflected in other communications, strategies or funds.

Schroders Investment Management Ltd registration number: 01893220 (Incorporated in England and Wales) is authorised and regulated in the UK by the Financial Conduct Authority and an authorised financial services provider in South Africa FSP No: 48998Read more insights from Schroders here

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