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Season 2, Episode 11: Bargain Hunting in Frontier Markets, With Hedi Ben Mlouka of FIM Partners

Frontier markets are at greater risk of coronavirus fallout, but there are opportunities

Hedi Ben Mlouka joins the podcast to discuss his views of frontier markets in light of the coronavirus crisis.

Ben Mlouka has been investing in frontier markets for more than a decade as CIO and CEO of Dubai-based FIM Partners. He sees the asset class in general as being at greater risk of being impacted by fallout from the COVID-19 epidemic. The political risks are particularly vexxing.

Content segments timestamp:

  • Is this a good time to be investing in frontier markets? (6:03)
  • The first part of the equation: Frontier markets are less prepared for the coronavirus than developed markets (7:05)
  • The impact will be larger from a healthcare perspective while the policy response can be expected to be weaker, especially in fragile economies (9:56)
  • The crisis will expose the “downside of globalization,” precluding a “V-shaped” recovery (11:30)
  • Where are the opportunities? Oil importers like Pakistan and Egypt can benefit (15:26)
  • Speaking oil, forget about the demand shock for now. Oil prices should recover to $50 or $60 per barrel (18:57)
  • Beyond the macro picture, industries with access to capital are preferred. Avoid travel, hospitality, banks. (21:07)
  • Healthcare, education, retail, and consumer discretionary companies should recover over the long term (23:56)
  • Political risk is a major concern for many countries in frontier markets. Who’s most vulnerable? (31:09)

More information on the guest:

Not intended as investment advice.

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Season 2, Episode 10, Transcribed: Coronavirus Crisis Continues, Expect ‘Rolling Recessions’

Moderator 0:02
Welcome to the Contrarian Investor Podcast. We give voice to those who challenge the prevailing sentiment in global financial markets. This podcast is for informational purposes only. Nothing on this podcast should be taken as investment advice. guests were not compensated for the appearance, nor do they supply payment in order to appear. Individuals on this podcast may hold positions in the securities that are discussed, listeners are urged to educate themselves and make their own decisions. Now, here’s your host, Mr. Nathaniel E Baker.

Nathaniel E. Baker 0:36
The situation around the corona virus continues to escalate. Markets are apparently at the whim now of policymakers in the US who are debating a congressional bailout of sorts to help the public in the US as well as corporations. And to that extent, I have a guest today, Rachel Ziemba. She is the founder of Ziemba Insights here in New York and a professor at NYU. Among other things that she’ll tell us about later.

Before we roll the tape on that I wanted to remind you of the first ever contrarian investor virtual conference that is taking place on Monday, April 25. At 4pm after the markets close, this is still happening as it is a virtual conference that requires no in person interaction. To find out more you can go to the website contrarianpod.com/event and read about it there. There is a early bird special on tickets that is still available at the time of this recording, but those are going pretty quick Quickly, but to take advantage of those just go to the website contrarianpod.com/event. This is something I am doing in partnership with ValueWalk. We have a couple of hedge fund managers already signed on to discuss some ideas. I believe these are going to be short ideas very timely as an exclusive for people who attend this virtual conference. So check out contrarian pod.com slash event. And here is today’s podcast. Enjoy.

Rachel Ziemba You are the founder of Ziva insights, a professor at NYU, and a geo economic and country risk expert. We are here of course to talk about the corona virus, which is wreaking havoc in financial markets and to the global economy. Of course, the health issues are paramount and we hope everybody stays healthy or gets health He, as the case may be, but for our purposes and now having you on the podcast, I wanted to get your views a little bit on your assessment of the economic impact of this coronavirus.

Rachel Ziemba 3:15
Thanks for having me on the podcast. It’s time you know, given the unfolding interlinked crises that we’re now experiencing, it’s an ideal time to sort of recognize what we know and what we still don’t know. What we know is that the economic impacts of not only the virus but the mitigation policies are incredibly dire. From day one when it was or not day, one, maybe day 30 as it was evolving in China. What became clear to me as an economist was that this was very different than past health crises and pandemics as soon as China put 50 million people on lockdown and shut down economic activity in Wuhan province that of course has manifested to rolling, lockdowns, quarantines and shut down quite a lot of economic activity around the rest of the world, even as the Chinese economy is reviving. So this has been, you know, economists like myself, until recently engaged in a debate over was this more a demand shock or a supply shock? I think it’s very clear now it is a very deep demand shock for oil and commodities for a wide range of goods, and also a shift in demand. And so I think this is going to mean some form of of rolling, rolling recessions. every data point we look at right now almost looks historic and are not reflecting the situation on the ground today. Even this from a week ago. You had several hundred thousand people filing for unemployment. When we think ahead to next week, it will probably be even greater. These will be people who still have cost to pay bills to pay, they might be sequestered. But their bills are not sequestered. And so that’s why the measures we’ve seen in the global from global policymakers are so important to keep element individuals and elements of the economy on a lifeline, so that we can try to evolve so that we can try to kill the virus, right? We’re shutting down parts of the economy to try to kill the virus, that obviously has collateral damage, but having millions and millions of people dead would be not only a massive human cost, but a major economic one.

Nathaniel E. Baker 5:48
Of course, yeah. And the question is, a recession, as you know, as any economic student knows, is two consecutive quarters of negative GDP. So we’re now in March, we’re still the first quarter. Do you think that this tips the first quarter GDP, at least in the US into negative territory? You mentioned rolling recessions? And then are we looking at a negative GDP in the second quarter as well? Just based on what we’ve seen so far?

Rachel Ziemba 6:22
Good question. I think there’s a good chance we might not actually see negative growth in the first quarter. Over the course of the quarter I’ll be very different activity. The US is not a country, some countries they release monthly GDP statistics. Here, private sector, individuals do factor it out. But we will see all the economic indicators. Now going into January, things were relatively decent parts of the economy were still pretty decent in February. You know, retail sales for February, were not actually that strong. But you know, they were sort treading water. March is obviously going to be a very month, perhaps for all sorts of elements beyond, you know, beyond those involved in the supply the online sale supply chain for basic goods. So when we think about what’s a recession here in the US, not only is it a two quarter, two quarter consecutive growth is a sort of a three hand use. But the NBR, who dates recessions also looks at depth of peak to trough loss of jobs, and looks at a variety of macro indicators. So there are some examples of recessions that are shorter than two quarters. And so it’s highly likely when they do date, the start of the recession. It might well be starting in February. You know, we’ll see depending on the different data, you know, I think what’s unique, perhaps In my mind about this episode is that this is a very sharp downward adjustment. And, you know, again, some of that is is by design. This wasn’t planned or anticipated, but it is a policy response to try to avoid significant loss of life. Yeah. So I think this is one of those cases where I would be less hung up on the semantics of Is it a recession or not and just what’s the pain but but to your other question, which I realized that I dodge? What about q2? Yeah, I think q2 is going to be painful as well. In you know, in the US, but also in in some other parts realistically in the US, public health experts of which I am clearly not one, either. But I feel like we we’ve all been trying to understand more so that we can create our shorter videos, which is all we can do under the circumstance. But public health experts say that for some of these lockdowns and shelters in place and other measures, this might be a story of months, not weeks, schools might well be closed through the end of this school year. There’s also there is a scenario of new rounds of closures in the fall. But let’s hope that that’s not the case. So I think if we’re looking at it on a global level, and you know, q1, China clearly had a major contraction. We know that from the data, Europe, which was barely out of recession from last year, they were treading water. This is obviously you know, not only Italy, but France, Germany, the United Kingdom, all sort of facing some of those shutdowns and and the United States. And now I think we’re also moving to a number of other emerging markets and some countries in the southern hemisphere that are doing maybe should border lockdown. So and then I think you add on to that the balance sheet impacts of the the recession and financial stress that we’re seeing. One thing I think that was surprising, I’m sure you noted it and your guests have talked about it was was how little financial markets reacted to the crisis initially, well, right when it was in China, even then it probably would have had a meaningful impact on forward earnings. But you know, people look past it. That was overly optimistic, obviously, even from an economic perspective. I think we have to think about well, what happens with individuals who are losing their jobs now? Or companies that are struggling to pay their bills? And will they rehire and bounce back in the same way? Will all the activity events, conferences travel, going out to eat? Is that going to be rescheduled? Or is it Just going to be and when it comes back, or when we reach a new normal, will it be? It probably won’t look like the old normal. Some of the sectors of demand might shift.

Nathaniel E. Baker 11:13
Yeah, yes. On some very important metrics there. The one question that I have before we talk about the potential recovery is just how deep does this thing go? This is very much unprecedented. As you mentioned, I don’t think we’ve none of us have seen anything like this. Certainly post World War Two. I can’t think of anything like this where the entire global economy not all at once but in enrolling as, as you said, been shut down. And where all economic activity has basically ground to a halt. So how deep are we looking here? What types of things are you looking at, to kind of get a sense of just what the fallout will be and what the damage will be.

Rachel Ziemba 12:01
Yeah. So I mean, obviously, we look at other examples like, well, in the get go when it was more mild, we looked at, you know, sort of other epidemics like SARS, to think about the sectors that would be most affected. And that from very early on, it was clear that wasn’t a very useful comparison. And then I think comparison shifted to the global financial crisis, which many of us can remember either from a trading perspective or living through it. That of course, was different because it started out It started out as a leverage, you know, a leverage based crisis that then had a meaningful real economy impact right, and we didn’t know the uncertainty of demand. And so it created economic loss here. It really is a starting from economic you know, a health and economic and competence and other shock in a planned shutting down for a time of major parts of the economy. One does look at examples like, you know, what can we learn from some years in the Great Depression? What can one learn from, as you say, the ramp, you know, the ramp up and ramp back down in certain countries in after the Second World War. But I also think one of the things that’s important is the drivers of economic growth, the contribution of economic growth is quite different. We are now in many economies, a much more service driven economy. And I think even you know, and we’ve known that, but what this crisis manifest to me is, it’s a real divergence within the service economy, I mean, ever will hurt. But those people and you know, I, I work in a service industry, obviously providing you know, economic Market Insight. That’s a service that can be delivered from my home.

Nathaniel E. Baker 14:00
It currently is as we speak

Rachel Ziemba 14:05
As with so many people, there are others who were in segments that maybe it’s less easy to deliver from their home, but they’re still doing it in person services, travel experiences, the kind of thing that consumer advocates said everyone wanted to buy, particularly millennials, that’s not available. So I think what what the examples I look at, I tried to put together past examples, and then think about plausible scenarios. But I tell you, it’s a very hard time to, to forecast. And I think any economic forecast that’s out there needs to have pretty wide error bands. Yeah. And and I think they need to be seen as indicative, rather than necessarily realistic. So what So what can we do in this circumstance? I think what you know, we can highlight, you know, what are the kind of cases catalyst we watch for to see whether some of these dynamics are bottoming out. On the economic side, we think about how much policy initiatives might make a difference, because policymakers are no longer are not asleep at the wheel, right, which is good. Maybe sufficient insufficient, but but necessary measures. And then I think we think about what what’s the what are some of the ways in which consumption patterns production patterns might change. And, and that’s, I think that’s the kind of thing we have to do. And then we also I think, have to watch for weak links financially and otherwise, we’re now at a point where we’re now at a point where the Federal Reserve is rolling out measures faster, you know, sort of Fast and Furious almost every day or several times a day. Some of them are measures that were creating the global financial crisis, but that’s a function that they’re worried about blow ups and Worried about this massive demand for dollar dollar liquidity manifesting across the globe. And so the risk is that starting from the demand shock through to financial channels through to a wave of insolvencies, will, will will further damage balance sheets and make it harder to rollback.

Nathaniel E. Baker 16:25
Yep. And then that would create a whole crisis that feeds on itself as people rush to cash. And we saw that in 08/09. And to some extent, we’ve we’re already seeing it now. To that point, you’re a country risk expert. What are some areas of risk that you are looking at here that we may not have accounted for, and that may make the worst case scenario potentially even worse than people are figuring right now.

Rachel Ziemba 16:54
So one area that I’ve been focusing on a lot is the implications of the Oil, the oil price collapse. What that means to, well, both parts, you know, sort of countries that are reliant on those revenues, but also regions within countries, including even the United States that are highly reliant on these on these cash flows. There’s a whole wide range of political and balance sheet risks that manifest on the energy side. Of course, all the crisis conditions have been exacerbated by the oil conflict and posturing and decisions by Russia and Saudi Arabia, to if anything adds supply at a time when demand is collapsing. But But I bring this up because of course, you have a number of oil rich countries, Algeria, Iraq, obviously sanction countries like Iran and Venezuela, who are very vulnerable and have an opportunity to undermine regional stability. You also have it dynamic and maybe this is less country risk and financial risk. But you also have a real question mark, throughout financial markets, the corporate bond market, and and more generally. So it’s probably too a little bit too early to say all of the national security implications of not of having weak, sort of weakened balance sheets in countries that were already struggling to give their citizens basic, basic support.

Because like Nigeria, places like Iraq and elsewhere, but I do think that there will be meaningful, you know, meaningful costs, we might see another resumed wave of protests, such as you know, as the story 2019 and the like. And then I think it’s also important to note that unlike in past cases, where the oil price fell sharply, it’s not clear the demand you know, it’s not clear Who is going to help very much now? There are clearly still people driving, if only to go to drive in testing facilities in this country. But I think one of the biggest there’s there’s a reckoning coming. Another kind of element that I think is concerning, is the way in which this conflict is exacerbated the US China knology economic and broader competition. Now, I mean, it’s it, of course, it would be affected by it. I mean, this was a health crisis that the first cases were in China. China’s hiding of information attempt to suppress information clearly made it worse for China worse for the globe, made it harder to treat. Now, the unfortunate thing is we’ve seen other countries also react behind the curve and not be as transparent as we’d like. The danger I see right now is after having seated you know, after having seen started this after having exacerbated this crisis early on. Now we see China taking a victory lap. Yeah, I see that neither the US position on this nor the Chinese position on this. Neither Nero said neither has clean hands here. And so I do think there will be an increased sort of ramp up the other broader concern. I think more generally, you know, we, you know, we might yearn for the days of looking back and thinking about trade wars and export controls and technology conflict. It’s very clear that the response to this crisis has been not only to increase border it make it more difficult for people to cross borders. But last I look, there’s some research that said that over 50 countries had put export restrictions on selling key medical equipment needed for tour You know, it could be involved in treating the disease personal project. equipment, ventilators and the like, and that might be at an individual level of rational decision. health systems need to secure it. But it does make it harder to treat what is actually a global a global crisis. And I would say that some of the policies that for example, the US, the US continues with around keeping import tariffs high, and the like, made us less resilient. So I would watch not only what’s done right now, in the next couple days, weeks months on these issues, but also, how does this feed into nativist policies and desires to supply chains? I think it’s very wise for the US and other countries to say, how do we avoid being reliant on one supplier? How do we build in redundancy, how do we stockpile enough but I do get as an economist who He gets a little worried about managed trade. I get a little bit worried when the policy responses, well, let’s just build up everything and revive our manufacturing sector. So I think we all these issues are going to be lasting issues that not only impact how we weather this sort of crisis today, but the next the next months and years.

Nathaniel E. Baker 22:21
Yeah. Is this the end of globalization? Rachel, this actually predates the crisis. There’s been some writing about it. Globalization was already in retreat.

Rachel Ziemba 22:31
Yeah. So I mean, globalization, as you’re saying that has really been under, you know, under question under strain I, I don’t think it’s the end of globalization. But I think we’re already in a point where there’s redefinitions, reconsiderations and a lot more government involvement. In addition to my work for financial sector clients, I do some policy analysis for Think Tank called the Center for New American Security. spend a lot of time thinking about exploitation. polls and other and sanctions and trying to think about how use of some of these measures which are, in fact, you know, sort of government’s trying to mediate, you know, mediate markets and globalization, how those might better serve, lobby. So US national security interests, but also, but but also a range of other objectives. I think it changes the types of globalization that we have. And I think it definitely ups the ante for those who are native us and isolationists and others. But what I take away from this incredibly sad health health crisis, is that locking one’s doors does not solve all of the problems. This is a global crisis. And in fact, a policy response that relied too much on a perception That closing the borders would mean there was no inflows of the disease and being unwilling to sort of accept that there was a community spread and local generation I think, put the US, the US behind the curve in in tackling it. So I think as you say there has already been a been a challenge. There are I would think still Chow. There’s still issues that require global solutions. And that’s, you know, I think that’s going to be an important testing thing to watch. Now, obviously, in the next couple of days as policymakers try it may try to coordinate a bit more.

Nathaniel E. Baker 24:42
Yeah. All right, cool. I want to take a short break, and then we’ll come back and get some more views from you, Rachel.

Moderator 24:53
You’re listening to the Contrarian Investor Podcast. You’re on iTunes, Spotify, Stitcher, and other places. podcasts are found, subscribe and supply and almost rating. We on social media search for Contrarian Investor Podcast on Twitter and Instagram. You can find us on LinkedIn as well go to linkedin.com forward slash Contrarian podcast. We want to hear from our listeners, email your thoughts to feedback at constrain pod.com a repository of all podcast episodes and materials is available on our website contrarianpod.com. Now back to the program. Here’s Mr. Baker.

Nathaniel E. Baker 25:35
Welcome back, Rachel Ziemba. This is the segment of the show where our guest tells our listeners a little bit about her background and how she came to this stage of her career. So I’m sure we’re all curious to hear about this. And so why don’t you just take away Take it away and fill us in?

Rachel Ziemba 25:56
Sure. So my background becoming sort of a political economist. On the one hand, maybe was a bit of a birthright that I tried to shake. My father’s professor of finance runs a runs a smaller equity futures fund. My mother is an economist, I wanted to do very different things that I had decided that history and other kinds of social sciences where I wanted to be, I didn’t really want to do a lot of economics work. But you know, we talked about all these things growing up. But as I went through college, and even, you know, I found myself more and more interested and puzzled by certain economic arguments. And so I went off and spent time as an intern in the, you know, in a couple of state in a couple of embassies for the US. And I found myself kind of facing economists who are making strong arguments about different policy decisions. I said, Well I better learn more about this. So I can know whether my visceral reaction to the right and wrong is correct. Or, you know, to be able to fight fire with fire, so to speak. And so then I went off to, to Oxford and studied political economy. And I did a lot of work on the politics of dollarization and exchange rate policies. This was the, you know, the early 2000s. And you had financial crises in Argentina and Turkey, and well, are many, you know, many other countries. And so I wanted to know, why does somebody take on another country’s currency? And what does that what does that mean? You know, obviously, lasting elements. And so from there, you know, obviously, by that point already into sort of trade policy, and the way of using the historical background that I developed to try to understand how it impacted today’s policy decisions how to institutions matter how and the like. And then I started my career working in international economic development, mostly in the Middle East working with small projects, mostly for the Canadian government. But I said, you know, we’re doing small projects for individuals, and we were helping them. You know, we were helping local academics to do economic analysis, but I sort of felt that I, it was sort of too small. And we were making things only on a micro level, I mean, doing very important work, of course, and so I decided I still wanted to do internationally relevant work. And I had the opportunity, the hubris to apply to work for Roubini global economics, Nouriel Roubini in 2006. I applied for a job and sort of was at the firm throughout the whole ride before, during and after the global financial crisis helped really sort of build out some of the market and macro kind of capabilities and and spent about a decade working there trying to understand both the risks that we weren’t seeing upside and downside and what it might mean for markets. About two and a half years ago, I decided it was time to time to go after. And but I said, Well, what are the things that I like most about the work I do? I like being able to think short and long term. I like having policymaker. I like connecting policy, academia and markets and investors. And so that’s what I try to do now. I have a small consultancy that works with mostly by side investors, who do a lot of work with some some governments, you know, more, you know, sort of briefing and also tried to, I learned a lot from my students and it You and elsewhere, they test my preconceptions in a way that even some of my investor clients don’t. And so that’s where I try to kind of keep giving new, you know, sort of new ideas.

Nathaniel E. Baker 30:14
Mm hmm. Very interesting. So as a student of history, I’m curious. We’ve talked about this already a bit, how this is unprecedented, etc. Nevertheless, people like to bring historic parallels in, if only to put things into context a little bit. We’ve heard comparisons to 2008 we’ve heard 1987 a lot, at least when markets are concerned. My caveat there is that this is exactly like 1987 iF 1987 happened four times in one week, but that aside, of course, 1929 gets a bit of airplay here in the 30s. What would you say is the most apt historical parallel?

Rachel Ziemba 30:55
Yeah, so I actually think the problem is, is that there isn’t a most apt historical parallel, which is, I know dodging your question. Because I think we are seeing similarities. And policymakers are trying to respond and use all of those examples that you’ve mentioned as cautionary tales. Hmm. Why are we sort of trying to lock down and flatten the curve and the like, we are using examples at a sort of city. And I mean, we’re using examples from epidemiological literature over, you know, over a century, but we’re also using examples of, you know, why did St. Louis fare better than, you know, Philadelphia under you know, in the Spanish flu, um, we are sort of, we are looking and saying, well, we learned about feedback mechanisms in the global financial crisis. And let’s use those tools again, because we can see points of stress manifesting. And on the one hand, it means that some of those policy responses can be enacted more quickly. Quickly, but it still means that but but this is something the scale of it is is much greater. I think one of the biggest challenges is actually the instantaneous financial market effects. I’ve been struck over the last couple of weeks by how much it’s both helped and hurt that there’s instantaneous information on Twitter, on social media as well as in the markets and have wondered myself what 2008 would have been like if Twitter you know, Twitter was a meaningful, you know, actor obviously, it did exist, I believe, but I mean, I personally wasn’t on Twitter until about 2010.

Nathaniel E. Baker 32:49
I was an early adopter. 2008 Sorry, go on.

Rachel Ziemba 32:51
Yeah, yeah, no, but um, but you know, I mean, there was lots of information feeding around other social media platforms, but there is a degree of Information and movement flow. And that’s that has, I think, helped and hurt. There are ideas we might, we might want to think about from past examples of even thinking about, is there a time for an extended if not bank holiday, but market holiday? You know, I have a certain sympathy, you know, for that. So I think all of this means that it’s cliche to say that we’re in uncharted waters, right. But I think that we are. So I think the best we can do is say, Well, what can we learn to not to? I mean, we seem to be making our own mistakes. When the hope is that we don’t make, you know, more, but I think the best thing we can do is to look at a range of these past examples and say, Sure, that’s not a full example. But what worked well, and how can we try to apply it and then what are those same mitigating policies we might need to put into effect To avoid further cascades. So one of the things for example, that’s so important about the degree of fiscal and credit and other support that’s going into going into that that’s materializing at this point or may materialize, is to try to, for example, keep businesses and households that are most affected on lifeline. Now, when we first started thinking about some of this a few weeks ago, the focus of who’s affected has probably dramatically expanded, right? This is not just about people who are being who are looking for sick leave to stay at home because they might be exposed. This is about people who are in whole industries that are moribund, hopefully they won’t actually die, but are being put into put on life support in the hopes of avoiding further further infection as a society. So that’s where and then This is where I think Unfortunately, the US has there many ways in which the US has less resiliency than some of its peers. Right? So both questions around health insurance and the health system, the cost, it means sort of for individual families, but also, but also the fact that there isn’t a systematic unemployment insurance system that covers a lot of increasingly precarious sort of precarious workers. We have examples of people who’ve been furloughed rather than fired and therefore they’re not eligible for benefits. We also know and there plenty of other countries where people don’t save and have cash on hand, but the statistics of how many Americans have would struggle if they had an unanticipated bill of $400. Right. So I think a number what Congress is trying to do, and the more sort of systematic. It is in both trying to provide some lifelines to a range of small and large companies that are affected, but also individuals, that’s going to say a lot on our ability to keep things running at a low level today, but also what we’re going to be able to do in in the future. And those are among the lessons that we learn from some of the past crises.

Nathaniel E. Baker 36:27
Yeah. So there’s been some talk, hopeful talk, optimistic, optimistic talk about a V shaped recovery, which, by the way, I’m not entirely sure those ever happen. But who knows, or if they do, then it maybe wasn’t that big of a drop to begin with, and it’s only, you know, viewable in retrospect, but nevertheless, these opinions, very well argued, many of them do persist. It sounds from your Take that you are a little bit less optimistic. And you view this. But you think that the trough of this thing is going to present persist a little bit longer than a pure V shape? Right?

Rachel Ziemba 37:18
I think that’s probably true. So I think when I look at historical context and look at V shaped recoveries, often those we’ve seen those say, in individ, some countries that say, like, say in the global financial crisis, there were countries that had a relatively V shape. But the global economy definitely didn’t and the countries that tended to be able to have a V shaped recovery either hadn’t had a maybe they’ve had a sharp shock, but they had policy space to adjust to it. You know, think about China for example, well, financial crisis that was able to Turn around and do masses of credit stimulus in particular, had its own costs eventually. And that was a measure that helped a number of those countries, especially commodity export or supplying China. There are a number of other emerging markets that had a lot of fiscal policy space that they used. A lot of those don’t have that space anymore. But, you know, again, all the literature would say that a crisis that has a financial component tends to take longer to recover from and partly because they, you know, just for a range of reasons, I’m cautious, but this is the self imposed nature of parts of the financial shock here, to try to avoid a worse even worse outcome mean that some of it mechanically might Sort of bounced back. There are countries that might be more able to do that, again, China is maybe one of those because you didn’t have a lot of you didn’t have a lot of job loss. Mm hmm. A lot of forbearance for companies to keep their staff on hand. And now you do have some additional demand. Even in China, I don’t think it’ll be exactly be shaped because they rely on demand from the global economy, including some of these countries that are on lockdown. Now, the more medical equipment associated medical equipment, protective technology ventilator is anything that China can produce, people will buy well in excess of what they would would have demanded before. But there’s a wide range of other products that they will not be demanding in the same in the same amounts. I think we’re more likely to face so the the extent of the trough I think does depend on How long we keep these restrictions in place? Right, that in itself is reliant on health care, you know, sort of on health outcomes, the spread of the virus and the like. But I think what’s more like what’s likely when they are lifted? You know that there will be a slower rebuilding of inventories, some restaurants and firms and the like, will have ended up going out of business. Yeah. Some will be shifting into new areas. And there’s also a possibility for a W. Speak, I’m not maybe not at the global con, I mean, the most likely trigger of a W shape in which there is you know, the downturn and then a move back up and then a renewed downturn is of course, if there’s a major recurrence of the virus and you just shut things back down in the fall. But you also could see it individual country level. Bit of a W story, China that is now ramping back up. If well, either they face a recurrence or if they face a challenge, where demand for a range of their products is less extensive. Be something, something to watch. And again, and I know I’m speaking a lot about sort of China’s policy space, there are policy tools that they have available that other countries find more difficult to use. But those two come with costs, right. They have exacerbate some of the debt levels that companies face has been an even greater reliance on state run companies in China as a response that’s good for emergency response. It’s less good for sustainable growth going forward, and less good even for the sort of small and medium sized enterprises that account for a lot of employment in China. So I think As this has deepened, and I for one, you know, saw some of the, you know, I saw some of the negative implications, but the speed and depth of this has and, you know, surprised me. I think there are clearly structural changes that will materialize, some of which we don’t know yet. And that’s going to mean, that’s going to make it harder to think about what, you know, real valuations sort of should look like.

Nathaniel E. Baker 42:30
Yeah. You mentioned China. I mean, most of China’s economy still is manufacturing. It still is an export economy. Mostly, I would think, to the US and Western nations. So with all of the its clients, if you were kind of shutting down their economies, how much of a V shaped recovery can China really expect to have?

Rachel Ziemba 42:54
Yeah. So I think that’s a that’s a concern now, some element so if You think about the sort of timeline here. In some ways, the economic impacts of the China shut down were a little harder to see, as it really ramped up right before the Lunar New Year, which is a period of time where China normally Chinese factories shut for a week or two, you know, usually about two weeks, because there’s the week of the holiday. And then there’s some other travel time. And so a lot of buyers in the US and elsewhere, they pre order ahead of time, because they know it’s going to take you know, there’s going to be this lag as opposed to ordering all the time. So I mean, you’re right that manufacturing and especially exports is still an important part of China’s economy. But it’s important to note that actually, China now over 50% of China’s economy is services, internal tourism that of course has been completely stalled. Uh, you know, sort of retail and e commerce and and increasing. I mean, they still don’t export a lot of services aside from tourism, right. until quite recently, you could go to any major tourist destination in the world and see an increased number of China, you know, sort of Chinese tourism, and particularly the case, it was particularly the case in parts of Southeast Asia elsewhere. These were really important to a flows of funds for places like the Philippines and elsewhere. Is that that’s obviously, you know, how much other countries can help. So I do think that there will be segments, the the demands will shift and that’s one of the reasons why I think there’s a risk for China, that there’s a bit of a slightly less aggressive w that couldn’t wise I mean, the downturn is unlikely to be as strong as you know, as you know, sort of shutting down so much of the economy for You know, sort of for a couple of months, but I do think that that will sort of feed through you know, and then there are, you know, China is among the countries maybe that can benefit a little bit from this oil price collapse. True. Add some, some storage MB do a variety of things. But yeah, I think it’s going to be a difficult The more I think about it, it’s and I have been over the last couple of weeks or the last couple of days really, it’s it’s going to be a difficult 2020 and then I think it raises interesting questions about what the growth kind of rate in 2021 looks. So I think more generally across the global economy, some of the question mark is, how much as as balance sheets deteriorate, and you have some insolvencies, and and the like, what are we what are we sort of What are we left with? The optimistic view? You know, I think this has been, you know, probably, you know, I feel like I’ve obviously been talking a lot about a lot of negatives that we face. And I think that’s right. One of the almost maybe optimistic things I would point two is that we are now at a point that on the brink, there are a number of policies that were floating around there in the global economy that the crisis has facilitated. You have European countries that weren’t ready to think about fiscal stimulus even though they had space. But using that space, they’re not there yet, but starting to think about consolidating and issuing you know, purpose determine European bonds and the like. We have in the United States, maybe only temporarily, with some understanding of how do you how do you support people with with basic income. You also have a recognition At least in crisis time, there is not a challenge of issuing more debt, if it’s used in a way that is not inflationary and can maintain growth or avoid a worse outcome. You know, um, there’s a lot of talk in the economics profession and the like about modern monetary theory. Right. Not a full subscriber of that. But I do think that as long as your bar, you know, as long as you’re borrowing for things that are going to give a better return than your rate of your rate of capital, and they are going to be productivity enhancing or avoid a worse outcome. I think that’s I think that’s open. So there are a number of taboos that have been at least temporarily shattered. Mm hmm. An A B, was the policy mix. going forward? Yeah.

Nathaniel E. Baker 47:56
I’m wondering here as we’re speaking, you mentioned China. It’s probably a non starter to ask if there are any countries in the world, certainly major economies that are sheltered from this. As you know, every single country in the world is part of this global supply chain, in one way or another, I mean, name a country and we can talk about it either exports to China or it’s a beneficiary of China, you know, you look at the Philippines and Thailand and other places in Southeast Asia. But, you know, as I think as an investor here, looking for places to park my cash globally, other than maybe Antarctica, which I don’t think issues bonds, where else might somebody are any off the top of your head, or is there are there any other places that might be a little bit more sheltered from this than others?

Rachel Ziemba 48:51
Yeah, so So I actually think and there are challenges oddly enough for right now. China’s not one of the worst places in the world. And still I would go for sort of things that are protect, you know, sort of government guaranteed, you know, on the bond side and and otherwise. Some of I mean, I think in this sort of environment you want to go places where balance sheets whether on the corporate side or sovereign side are relatively strong. That doesn’t mean that they’re, you’re completely sheltered. I do tend to think I’ve had some debates with people in the last week about is this the kind of environment that decarbonisation and ESG goals go completely out the window, or I haven’t heard much of ESG this month? I gotta tell you, I think in earlier rounds, maybe not this week, but in earlier rounds of the big sell off, I think there was probably some there were some data points that I saw, some slight you know, outperformance of a stronger ESG you know, ESG sort of components that be said and we could have a whole other conversation about all the challenges of what’s the what’s the ESG or the divergence and how people are defining those economic, environmental, social and governance indicators. And all the information asymmetry is the materialize. But I do think that entity countries and companies that have sort of have strong governance have relatively stronger, you know, sort of cash flows, have stronger balance, you know, sort of longer, sort of liability structures, and sort of more more resilience are better places to be. But the time for that is probably it might be too soon.

Nathaniel E. Baker 50:46
Or too late.

Rachel Ziemba 50:47
Oh, you mean to move into them? Well, I’m just saying that I think, I guess what I’m saying is, I think even in relatively strong, you know, sort of relatively strong assets that there’s probably still More sort of flight to liquidity and quality and the relative outperformance. You know, people who put their money into zoom a couple weeks ago are doing pretty well. Yeah.

Nathaniel E. Baker 51:11
even look at a company like Kroger’s. Right, which has also done very well. Clorox has done well, there’s a bunch of these little little things here. So that there are I guess those are indications that some things do. Okay. Whether people have the cash to move into them now is of course, another question, as is the case of, as is the question of how much more upside there may be. Anyway, that’s pretty much all the time we have here. Rachel, thank you so much for joining us. Thank you all for listening and closing, why don’t you tell our listeners how they can find out more about you and where to see your work?

Rachel Ziemba 51:48
Sure. Thanks for having me. Now. It’s been a real pleasure. So people can find me on on my company’s website. ZiembaInsights.com and on Twitter at @REZiemba and look forward to being in touch with you and please feel free to be in touch to tell me what I missed and what what I should be watching.

Moderator 52:46
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Transcribed by https://otter.ai

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Season 2, Episode 10: Coronavirus Crisis Continues, Expect ‘Rolling’ Recessions

With Rachel Ziemba, Geo-Economic and Country Risk Expert

Rachel Ziemba joins the podcast to discuss the continuing, and intensifying economic impact from the coronavirus.

It’s become clear that the crisis has caused a demand shock that will likely bring “rolling recessions” in its wake. The most likely scenario appears to be for a “W-shaped” recovery. In the meantime, there is still a lot that go wrong.

Content Segments

  • The demand shock, shift in demand, and rolling recessions (4:27)
  • Unique characteristics of the coronavirus crisis (7:57)
  • Oil and oil-producing countries may be at most risk. Sino-U.S. relations can be expected to suffer (16:35)
  • Background on the guest (25:55)
  • Discussion of historical parallels: some similarities, but there is no precedent (30:16)
  • The unlikely prospect of a “V-shaped” recovery (36:26)
  • How deep might the trough be? (39:55)
  • Are there any safe harbors from this? (47:57)

For more information on the guest:

Not intended as investment advice.

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