Coronavirus: Let’s tear up the rule book

As the global economy grinds to a halt, liquidity becomes the number one priority for all market participants. Governments around the world are throwing in the kitchen sink offering a range of monetary and fiscal policies in an attempt to make sure cashflow issues don’t become solvency issues. Insolvency means unemployment and loss of pension funds and that has numerous economic and social disadvantages.

Huge gestures from the FED, Bank of England and ECB are making some analysts be more optimistic about future predictions but markets at the moment are reporting they are seeing 6 month losses and profits occurring in one day. Since China have seemingly curbed the spread of COVID-19 their markets are showing signs that confidence is returning. But with countries around the world invoking ‘war time’ mentalities we have to come to the realisation that the post-COVID world is likely to look very different.

The impact of Coronavirus is like nothing we have ever seen before and it is making it extremely difficult to predict where we are headed, we need to tear up the rule book. Corporate bond prices are suffering – albeit showing some positive signs, US stocks are down and even US treasury bonds, the ultimate safe haven, are off their peaks. Even more alarming is that the price of Gold – which normally rises in the face of uncertainty – not this time – gold mining stocks are down some 34%.

The immediate fear and rush for investors to sell off anything which could carry a loss in an attempt to gain liquidity is on. Even before the crisis it was speculated that consumer sentiment was fragile. As the central banks step in to support and floor the markets around the world, can we feel some security that we are not heading into depression? But how much more can they do? Who knows that there isn’t a COVID-20 around the corner? Some speculate that the developed countries will look to the emerging markets for new ways to operate their economies ,but what do they do differently?

All investors can look to do now is solve the liquidity issues and avoid insolvency, what’s to come in the future is impossible to predict. Investment strategies will change but what we can guarantee is that those firms and investors who can survive the immediate threat will be looking at more and more factors to help them determine their risk.

Some example we expect to see in the medium term…

• Social distancing and working from home will create the demand for traders to have access to enhanced automatic sanctioning of credit lines.
• Cash collection capabilities will shoot up the agenda as firms of all sizes will be looking to reduce their receivables portfolios.
• Credit scoring becomes more important but as we said before – we need to tear up the rule book – firms will need flexible models which can be adapted quickly.
• Workflow will become key to firms remaining efficient and keeping a tight rein on their risk management, seamless credit application and limit management will be non-negotiable.
• Sentiment analysis and Ai will be looked upon to enable daily monitoring of counterparties, rather than annual.
• Inevitable bankruptcies will drive credit system purchases.
• VaR and PFE metrics will be looked upon to drive great visibility.

Everything comes into play and we need to rely on technology and innovation in order to navigate the new ‘post-COVID’ world. A famous line from a famous movie….’It’s not a question of winning or losing, it’s a question of risk’ – name the film!