Are There "Zombies" in your Portfolio?
As talk escalates about restarting the economy, we begin to wonder what the world will look like for the next few weeks, months, and years. One thing is for sure…for better or for worse, we will never revert back to our previous lives – the outbreak of COVID-19 has permanently changed us in many ways, which will dramatically impact not only HOW we do business, but also WHAT businesses will survive.
The drastic economic slowdown in response to the outbreak has hurt business across the globe – some companies may be fortunate, suffering a relatively mild flesh wound, while other swaths of the economy have been utterly crippled and possibly mortally injured. Airlines, luxury goods & services, brick & mortar retailers, restaurants, hotels & lodging, leisure & entertainment…these industries are truly “bleeding out”, barely maintaining solvency.
The drastic economic slowdown in response to the outbreak has hurt business across the globe – some companies may be fortunate, suffering a relatively mild flesh wound, while other swaths of the economy have been utterly crippled and possibly mortally injured.
The Federal Government has stepped in with financial support to aid these businesses, aiming to keep them afloat through this unprecedented event. While the stimulus certainly helps, it very likely will not be enough to bring some of these businesses back to life. The longer it takes to control this virus, the more external support these companies will need to survive. It remains to be seen whether additional financial support will be given to injured industries (which taxpayers will ultimately pay for), or if they will be allowed to default. So, the question is, do we allow companies that are effectively dead continue to limp along feeding off the American people like zombies, or do we cut them off? While we all have various political, economic, and moral opinions about that very question, for our purposes that’s all irrelevant. What matters is how we prepare for and adapt to the various potential outcomes.
If the government should allow the mortally injured businesses to fail, how do we identify these “zombie companies” to reduce our exposure? In such an environment, broad-based passive indexing strategies may lag as they carry around the dead weight (pun intended). So, what’s the solution? Do we turn to more active management? Do we look for more focused opportunities such as thematic ETFs? Do we simply avoid positions and/or asset classes that are likely to have a denser zombie population? But then are we opening ourselves up to increased concentration risk through narrowing our investment focus? What if “zombie companies” are bolstered through this crisis – are we limiting our upside potential? These are all important considerations as we continue to discuss potential portfolio changes to react and adapt to future expectations.
There are many important considerations we are discussing with our trusted partners to determine what portfolio changes we may want to implement to react and adapt to future expectations.
Regardless of whether “zombie companies” will be pushed into default, it is clear some businesses will take longer to rebound from this outbreak than others. As such, it is logical to limit exposure to companies and industries that we expect may lag other segments of the economy, at least in the near-term.
On the flip side, we expect some industries will flourish for a time as the outbreak has greatly accelerated mega trends that have taken root in the last decade. Remote work, online retail versus brick & mortar stores, automation, technology advancements with robotics and artificial intelligence, innovations in healthcare, virtual communication – these are all societal trends that have taken off through this outbreak. While the explosive growth will level off, we fully expect the trend itself will remain as we continue to evolve and advance as a global community.
It is clear some businesses will take longer to rebound from this outbreak than others. Remember, we have to crawl before we can run.
Bottom line, we all have to crawl before we can run. Everyone has been impacted in some way by COVID-19, and it is not realistic to expect the world to quickly return to normal at the flip of a switch. We will begin to slowly turn the gears of our economy and reopen businesses across the globe over the coming months. But it will take time to overcome the inertia, and there will likely be a few false starts as we work through the growing pains of advancement and evolution. The world will never be the same, but maybe that’s a good thing…