“I have no desire to suffer twice, in reality and then in retrospect.”
― Sophocles, Oedipus Rex
As investors we take positions with foresight but are judged from hindsight. So come 2030, how will you judge your investment decisions during the COVID-19 dislocation?
A market dislocation may be defined as a material deviation from a long-term trend. If so, by definition, a severe dislocation simply increases the size of the readjustment required to return to-trend.
It follows that the potential returns while investing during a dislocation event exceed investing during normalised periods. For this reason, many investors have become amateur epidemiologists and macro-economists.
In the absence of personal credibility on either subject, I thought it interesting to share some charts which recently crossed my desk.
A shift in paradigm or volatility against a trend?
The spark of the current dislocation is COVID-19, the tinder is the restriction on the free movement of consumers and service providers, and the remedy will ultimately be the reinstatement of safe movement concurrent with a recovery of economic confidence.
If we use global air travel as an indicator, we can see from the chart above the relatively consistent growth over the past 50 years. One can assume this has been underpinned by the desirability of travel in conjunction with improving affordability.
The consistency has been interrupted mostly by economic factors. Arguably, the interruption in 2000 was longer due to the dual impact on desirability (safety concerns post 9/11) and affordability (many economies were in recession).
From a globally aggregated perspective, COVID-19 should be expected to cause a more prolonged interruption due to the compounding impacts of economic recession on affordability and the drawbacks of being enclosed in a confined space. But, as we have seen in the past, the interruptions are simply periods of volatility along an inter-generational trend.
Our key risk against a mean-reversion hypothesis would be a shift in paradigm implying a new trend line.
Our second chart considers domestic travel. Here we see that inflection has already occurred in many nation-markets to pre-pandemic levels. Australia’s domestic travel recovery has been an unfortunate victim of a decoupling of the states, however as we revert towards a borderless commonwealth we would expect to see a corresponding trajectory.
A medium-term perspective is key to investing in the current (COVID-19) environment
History tells us that dislocation caused by COVID-19 will end. It may not be quick, but mean reversion is inevitable. Businesses with a strong foundation of real assets or intellectual property, paired with a resilient capital and operating structure, will recover.
For investors, being able to identify (or selecting a manager able to identify) the right opportunities is key.
Taking an active investment approach in 2020, rather than sitting passive in cash, is more likely to allow us to look favourably, with hindsight, on our COVID-19 investments decisions come 20301.
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