Standing On A Needle

April 7th 2020

Standing On A Needle – “I know it’s in this haystack somewhere…”

In times of crisis and as I look to research in an effort to predict the future, to me it often feels just like that. Looking for, finding, then standing on the point of a needle! Sound painful? You bet it is but I think it’s meant to be. I believe that once the elusive answer or “needle” has been found, it’s to prevent you from mentally standing in one spot for too long without making a decision. Like waiting for the universe to make it for you as the point of the problem sinks further in. You have to fall to one direction or another but which side of the needle will it be? Assuming of course, that a needle has one. In this case I’m tending to fall forward to a brighter future.

 So…how long will this pandemic last and why am I so optimistic? 

This amazing “curve” that they’re talking about is apparently flattening. Aside from the fact that no-one can tell me what it relates to, I am told by curve experts from around the world that this is a particularly good state for curves and that when I begin hearing the word “inverted” I should immediately don a large, knowing smile on my face and go about my daily isolation filled with joy. It does actually seem from the statistical info I’m reading that we may well have reached “peak infection” which is clearly not as grammatically pleasing to the naked ear as “inverted curve” but nonetheless, a good place to be in the overall scheme of things.

If this is the case then we could see (may be seeing it now) a recovery start earlier than I expected (my initial thoughts were mid to end May). As we saw from the first false start when the Canadian company Medicago announced they had developed a vaccine (13/03/2020), global markets are just as capable of going rapidly UP as they are capable of going rapidly DOWN when we saw the ASX200 Index jump from 4,800pts mid morning to 5,600pts in an afternoon rally that made your nose bleed. As we reach peak infection and shortly thereafter begin to invert our curve like a well practiced limbo dancer then we will see an immediate vertical upswing (haven’t developed a term for that yet) in our market. How long will this pandemic last? As I’ve said before – not long I don’t think but for me, now, I’m wondering how things will look……

Unemployment is of course going to be a big if not the biggest issue. I believe there will be companies and businesses out there who will use this event to their advantage by only rehiring the people that they want where previously they may have been wondering how the heck they were going to reduce their existing workforce without being smashed with unfair dismissal suites.

Commercial rents will trend down pretty hard. The virus and subsequent lockdown will test many, many businesses around the country and even with the various stimulus packages, many businesses will simply fail. This will occur for a number of reasons;

  •       their sector may have already been over serviced or,
  •       the business may have been carrying too much debt or,
  •       their business model might have been wrong to start with.

Whatever the reason, as more commercial space is made available, rents and indeed commercial property prices will drop.

Residential property prices will drop too due to increased mortgage stress caused by the above points bringing rents down with them but families, working or not, still need a place to live so I don’t see as big an impact in the residential market as I do in the commercial space. New builds will be hardest hit as existing contracts run out or complete and far fewer new contracts will be entered into, again because of the above points. We are a property advisor on the Sunshine Coast to help you.

So to wrap up and purely from a financial and investment perspective (the global cost in human life will be discussed for many years to come) generally this will turn into opportunity for many investors. Businesses large and small will become leaner and will have learned how to apply new tech with which to run their businesses more efficiently. Remaining businesses with resilient models will emerge and become stronger with less competition. Operating costs will be lower and profit margins will be higher. On a small business level this will mean a better income for proprietors while at a corporate level it’ll mean an improved balance sheet with less company debt equating to higher company valuations and a stronger share price. One that this next time around will be better supported by fundamentals rather than the thin air we saw recently.

From a property perspective, we will see land prices come down as over-leveraged developers unload their stock because they cannot write new contracts. Build prices will come down as trades thin out from lack of work and materials will be repriced downward as suppliers grapple with unpaid trade accounts. A lack of new product coming onto the market may invariably support the medium term valuations of existing property notwithstanding a short term drop as mentioned before.

Basically the law of the jungle will prevail. Try as we may to prop up this and stimuli that, Mother Nature always seems to have a way of telling us that She’s had enough. In my experience, what flows from the devastation is generally good, like fresh regrowth. What’s the “point” of all this “needling”? I’m betting “north” which is where I believe the markets will go if this virus doesn’t “encompass” us all.