As a risk manager, one of the most important tasks is to recognize the danger in good times and to soberly analyze the future in bad. Times are currently bad – but from a purely analytical perspective, the outlook is changing. It’s time for some optimism.
Politics and economics are moving like pendulums: After downplaying the dangers of the novel coronavirus to society and the economy even after the outbreak in Wuhan, this swung to the opposite extreme a few weeks ago. Politicians are competing to implement the most restrictive measures, while economists are vying with each other to create horror scenarios: recession, depression, the worst depression of all time, or even the collapse of the economic system? There seem to be no limits. The stock markets are yo-yoing, infection rates are rising, and companies remain closed. The situation is devastating for a society geared towards economic growth. What can be said that is positive in light of these stark facts?
It is the broad framework that gives cause for optimism. We are seeing a strong wave of international cooperation and willingness to help. At the height of the crisis, the EU sent medical supplies to China. Now China is helping Italy with aid, just as Russia is sending medical supplies and personnel there. Germany is taking in patients from France and Italy, protective clothing is being shared internationally, and the list goes on. In addition, we are observing a realignment of priorities in the economy and society. People’s health is being prioritized over economic prosperity. The promptly announced abandonment of the balanced budget and the promises of rapid and unbureaucratic aid underscore this.
Anyone who now thinks that this crisis will last a long time, perhaps too long, is underestimating the incredible innovative power of humanity. Laboratories around the world are working together to develop a vaccine. In the USA, virologists have just been provided with “Summit,” the world’s fastest supercomputer, whose actual purpose is nuclear research, for their research. In Germany, the most powerful computing resources currently in Europe – one of which is the research center in Jülich – are being used to simulate active ingredients for the development of drugs against the coronavirus. In the search for a vaccine, scientific success seems to be prioritized over economic success, at least temporarily. Almost unnoticed, researchers are also working on promising approaches to drugs to treat the disease. These could be available much sooner than expected and make the pandemic manageable.
There are also other positive developments: In times of crisis, we are once again learning to appreciate public health systems that are geared toward the well-being of people and not primarily toward profit. We see that our still-strong health care system is helping to prevent deaths. We have the capacity to help our neighbors in need.
It is encouraging for the capital markets that we are once again being shown the vulnerability and fragility of a system based on short-term financial success. If we learn our lessons this time, we will pay more attention to real economic success in the future than to the successes of financial engineering. In addition, the current situation is acting like a turbocharger and will significantly accelerate the implementation of modern digital technologies in the broader economy. In Italy, 3D printers were used to produce spare parts for ventilators that were needed at short notice. In China, autonomous vehicles were used to disinfect public spaces. Autonomous robots are being used to disinfect subway tunnels in Hong Kong. Overworked medical staff in the US and China are being supported by new, semi-autonomous systems. This not only relieves the burden on employees but also slows the spread of the virus among them.
The reduction of financially motivated excesses, a massive surge in innovation and increasing productivity through digital technologies, as well as a return to our core values, accompanied by far-reaching fiscal policy measures, will offer opportunities for investors and open up sustainable sources of income. And even if it might sound a bit cynical at this time: For long-term investors with sufficient risk tolerance, these are now favorable buying opportunities.
The crisis is not over yet, but it could potentially end sooner than many observers expect. However, it is also almost certain that a recovery will be accompanied by significant volatility. Anyone expecting a rapid and perfectly straight upward market now – especially in light of the sometimes strong daily gains – will be disappointed. Therefore, it’s time for us as risk managers to once again see the positives and the risks and build a protective shield against the latter. After all, given some hefty drawdowns already suffered, who wants to see their new gains shattered the very next day by unnecessary volatility? Risk management with an impartial perspective is the best chance for investors of sleeping soundly in turbulent times and being able to take advantage of these current opportunities.
