As Covid-19 cases are rising and many countries experience record heart-breaking numbers of new infections, hospitalizations and deaths, and while we are awaiting the production and distribution of vaccines, we would like to share with you below a summary of four articles with unique insights that may have an impact on our lives and portfolios in the medium term.

Covid-19 is Up-Ending Capitalism

Patrick Foulis, The Economist
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A traditional recession sorts the wheat of strong businesses from the chaff of weak ones. This year’s pandemic-induced recession is not a traditional recession; the winners and losers have been idiosyncratic to the underlying market fundamentals. As stimulus wanes and more firms fail, healthy companies will have an opportunity to invest in sustainable economic moats, but this comes at a time when the three tenets of modern business – the primacy of shareholders, globalization, and limited government – are shifting. While this downturn has already produced some notable winners – Silicon Valley prospects and Chinese firms, to name two – the artificial environment facilitated by government support will quickly dissolve as lending pivots to employment goals. It is likely that corporations will have to follow suit as cultural pressures encourage more considerations for workers and fewer for shareholders. At the same time, globalization seems to have stagnated, endangering the efficiency of multinational operations. With governments expanding worldwide and corporate tax rates already at historically reduced levels, a larger portion of revenues will be tied up in taxes and regulatory compliance. As all these changes shape the future of capitalism, businesses will have to adapt or die in the new era.

Why Value Investing Still Works in Markets

Michael Mauboussin, Financial Times
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“All good investing is value investing.” This prescient quote from Charlie Munger (Warren Buffett’s partner at Berkshire Hathaway) remains relevant in today’s markets, even as the widespread conception of value investing (buying stocks with a low price-to-value-factor multiple and selling when that multiple rose) has been challenged significantly by poor returns. Mauboussin argues that the issue is a shift in what “value” means. In the past, tangible assets (such as factories) were the foundation of a business’ value, but in an era of intangible assets (such as research and development), a business’ intrinsic value is less concrete. Given the disparity in the accounting treatment of tangible and intangible investments (the former is an asset on the balance sheet, the latter an expense on the income statement), it is unsurprising that yesterday’s methods fail to meet today’s standards. There is always a fundamental relationship between price and value; savvy investors know to look for intrinsic worth as the present value of future cash flows, however those flows are achieved.

Our Plague Year: What literature tells us about pandemics 

Arnold Weinstein, Foreign Affairs 
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Literature offers a more long-term view of pandemics and societies’ responses to them: a view we cannot match with scientific testing. For example, Sophocles’s Oedipus the King uses a plague backdrop to rebuke human’s capacity for self-knowledge. The play asks the question: Who is going to take the blame? Literature has highlighted the theme that mass death triggers recognizable political responses, including blaming particular groups of people. Authors have also long dealt with the human connection that viruses such as Covid-19 thrive on. Daniel Defoe’s A Journal of the Plague Year (1722) describes the incredible behavior of Londoners trying to survive the epidemic in 1665. Their challenges are very similar to our struggles with Covid-19: wearing gloves, cleaning everything, touching no one. Defoe also recounts the horror of mothers trying to protect their children and loved ones but inevitably infecting them through proximity – “familial deaths gruesomely occasioned by love.” William Faulkner also explored the theme of human connection. It can be an “explosive force in the world”, breaking down barriers and shattering taboos, but in the case of pandemics, it paradoxically threatens and exposes human connection. The pandemic we are experiencing today mirrors the pandemics our ancestors survived in the past. Human connection and experience transcend time. Literature gives us a much different understanding of pandemics than science could ever provide. 

The Pandemic Is Revealing a New Form of National Power 

Uri Friedman, The Atlantic
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The Covid-19 pandemic has revealed the importance of “resilient power”, defined by the author as a “country’s capacity to absorb systemic shocks, adapt to these disruptions, and quickly bounce back from them.” International power dynamics will be rooted in a country’s resilience, or lack thereof, when facing the “mass traumas” that will dominate this century, including pandemics, climate change, cyberattacks, financial crises, and disinformation campaigns. Because of our increasing interconnectedness on a global scale, systemic shocks nowadays have a much more paralyzing effect, cascading from one system to the other. On the other hand, a country’s resilience is determined by how well the interdependent systems that make up the nation are working. Australia and Germany are examples of countries that have been quite resilient during the Covid-19 pandemic. Australia was adaptive and dynamic in their approach, imposing early restrictions and preparedness measures even before the World Health Organization declared it a pandemic. In Germany, social systems autocorrect through government policies which are there to act as kickstarters when the economy begins to struggle. In both Australia and Germany, resilience was very much tied to the strong public trust in the government. 

Those countries that have proved resilient during the pandemic, even the small ones like New Zealand, have consequently become more influential actors in the world whereas those, such as the United States, who have handled the pandemic poorly have lost some of their influence and power. The US may have been expected to cope well with the pandemic due to its diversified economy and leading scientific innovation. Instead the pandemic highlighted many of the US’ vulnerabilities, including political polarization, economic and health-care inequality, a president who downplayed the threat of the virus and rejected scientific guidance, the country’s resistance to learning from other countries, among other things. There is still hope for the US yet as it can bounce back from this crisis and become more resilient in the process. “Resilience is not the absence of vulnerability….it is the ability to manage existing or new vulnerabilities in ways that do not allow them to overwhelm us to the point where we just fold.”