Capital Preservation through the Impacts of COVID-19
The global economic crisis caused by the COVID-19 pandemic has been dramatic and rapid. As governments figure out ways control the spread of the virus, flattening the growth curve of the virus has also caused the global economy to flatten. Economists and government officials face a very challenging dilemma of finding out how to protect the health of their country’s residents while preventing the economy from completely stalling.
Across the globe, unemployment numbers continue to climb, reaching higher numbers than seen in modern history. Numerous countries are forced to implement quantitative easing with rapid and large economic stimulus packages. This has the potential to cause inflation with a decrease in the value of global currencies and traditional assets. Many public companies that were generating predictable income and dividends are experiencing substantial drops in revenue. This, ultimately, leads to dividends being cut for the investors.
In the post coronavirus economy that yields a widespread drop in revenues and asset valuations, investors will eagerly be searching for yield and capital preservation methods. Investors will need to be proactive to protect and grow their capital during the times of economic uncertainty.
‘The New Normal’ for companies
With countries starting to flatten the growth curve of the virus and becoming better prepared for the medical necessities, we expect that governments will slowly begin opening their economies back up. This will start by easing restrictions on lockdown measures and opening specific sectors of the economy. This will strengthen the flow of essential goods and services and let more companies start conducting business under the new normal.
Critical to how quickly the world can reopen the economy is the timeline surrounding workable vaccines and antiviral drug treatments. Estimates indicate that it’s unlikely to return to the “old normal” for at least a year when the vaccine is released for public.
The resilience of essential service companies
Despite government support for businesses, there are many companies that will suffer irreparable damage and will be forced to close their doors for good. On the other side, particular businesses including online and essential services will be able to thrive in this economic climate. I believe that residential rentals is an asset classes that is poised to weather this interruption to the economy and thrive through any prolonged recession. Hard Real Estate assets that provide housing, critical services, or food to societies are expected to see a rise in values as consumers re-evaluate what is really important.
With health becoming a top priority, there is a high demand placed on pharmacies and health companies. This has ultimately, created a need for more support workers in this sector to keep up with the demand. Tech companies, specifically telecommunication software companies, will show resilience and potential valuation increases for investors. Many companies have been forced to transition to remote working practices for employees, which means they have had to embrace telecommunication software such as Zoom and Slack. Further to the demand for software, there is a heavy demand placed on technology support companies. Tech companies who provide IT support for remote workers are well positioned to thrive through the lockdowns.
The reflection of COVID-19 in banking and political systems.
A country’s banking system is core to its economic development and growth. Banking and political systems are tightly connected and, if they are stable, these systems can create jobs and opportunities for residents to create wealth. By investing in countries with strong systems, it creates the opportunity for strong risk-adjusted returns for investors. On the flip side, if these systems are unstable, there can be less opportunities for residents, but also can result in dramatic economic catastrophes. Governments need to understand the importance of a strong banking system and supervise banks to ensure they are practicing sensible lending.
An example of a dramatic failure of a banking and political system can be traced back to the 2008 United States recession. The government reduced the amount of regulation and restrictions on the financial industry. This allowed for hedge funds and investment banks to sell derivatives such as collateralized debt obligations and mortgage-backed securities. Banks were providing subprime mortgages to individuals with little to no ability to make the payments on the loan. These subprime mortgages were packaged and sold as mortgage-backed securities on the secondary market. The Federal Reserve began to raise interest rates causing borrowers to default on these subprime loans. The banking crisis was caused by a widespread default on and ultimately bankrupted numerous banks. The U.S. government was forced to step in and implement enormous bail-out programs for financial institutions. This example of a dramatic failure of the government and banking system can serve as a reminder to make investments in countries with political and banking stability.
Looking towards the future – the stability of the Canadian System.
Canada presents stable political and banking systems, a growing population, low vacancy rates, and increasing average rental rates. All these aspects point directly towards the strength of the Canadian residential rental market. Further to this strength, the Canadian government is committed to helping subsidize the cost of living for residents that have experienced a drop in income due to COVID-19. This helps ensure that tenants within the Westbow Capital portfolio will be able to pay rent, creating a sense of guaranteed income for investors.
Westbow Capital Real Estate Trust
Westbow Capital is a Real Estate Trust with a strategy that includes buying, holding, and renting properties in Western Canada. Our management team founded Westbow Construction, which has 40+ years of experience as a builder and developer of residential homes, so have a great understanding of the residential real estate market. With a strong understanding of the Western Canadian real estate market and numerous connections in the industry, the management team can make strategic decisions about what cities and provinces to buy and hold rental properties. Each province has different economic conditions, so the management team will leverage their expertise to use the best investment strategy in the various provinces.