The COVID Diaries: DCM originator 6

The following interview is with an Australian-based debt capital markets originator. It was conducted on 23 April 2020.

Do you feel you have adapted to working from home and how close are you to business as usual – personally and in the sense of market functionality?

We have a distributed team with most in Melbourne and a few in Brisbane. Instead of our usual morning call we are having morning video calls and, when we do talk to colleagues, we use video chat instead of a phone call. We are actually seeing a lot more of each other.

For a distributed team this is good, and I feel more connected to the business. The downside is that overall connectedness is lower as no one is in the office. I am very keen when this is all over to be able to catch up with everyone in person.

Has your view of the crisis and the nature of the challenges it presents changed? It seems Australia has prioritised public health over the economy, at least in the medium term. How are you thinking about that trade off?

It is a bit like any compromise – you try to get to a place where both sides are equally disappointed. At this stage, the health side is thrilled with its outcome and the economy is struggling, so I don’t think the balance is quite right. Although if people have a choice between life and money, they prefer life.

The route that has been taken is understandable. We can’t say what the economic cost is per life saved because there is no way of knowing how many lives have been saved. It is easy to have 20-20 hindsight for what we could have done better or worse. We are suffering from chronic absence blindness – we do not know what we avoided.

How do you think the exit route might play out?

It all comes down to what reserves people have in their businesses and how they manage other demands. We started with a health crisis bleeding very rapidly into a financial crisis and I don’t think the market is currently priced for that.

There is a lot of pent up energy – everyone is climbing the walls to get out of the house – so I think people will make a go of things from a business perspective when they can. On the flipside, I expect consumer demand to be much lower. People will be looking to build up cash reserves: no-one saw this coming and anyone who has suddenly experienced true financial hardship is probably going to ensure they have a rainy-day fund going forward.

This will drive a change in consumer behaviour which obviously will have knock-on effects for demand in retail, tourism, and other parts of the economy dependent on discretionary spending.

The big question mark is probably what happens to housing. There are predictions from rose-coloured glasses to doomsday. It will probably be somewhere in between, but it does depend on how long this drags on.

I think we probably have a while before we get back to whatever normal looks like and normal in the future will be different to what it was in January.

“I think there is a big disconnect in that the equity market is currently priced for a rapid, V-shaped recovery, indicating that we will get over this quickly. This is the classic ‘don’t fight the Fed’ mantra. Maybe this is well founded but it feels very artificial to me.”

What do you think will be different in that new normal?

Personally, I expect my business travel to be down by a third to half and I don’t think I am unique in this. There is a lot that we are realising can be done virtually rather than on site.

Many businesses will be a lot more embracing of people working from home. Many have always had the flexibility to work from home as required but it has been on an ad-hoc basis. I expect this might be embedded in work practice now.

If it is the case in small teams it will likely be greater for large corporates. This has knock-on effects for things like demand for floor space. This could affect corporate office demand, which then affects construction.

In retail, the move to online was previously split mostly by generation. I think people that were slow to embrace this move have had no choice now so this trend will be accelerated, and this will put pressure on large shopping centre operators.

Overall, I think face-to-face interaction will predominantly be saved for interactions that are of high value. Anything that can be done over the phone or virtually probably will be.

Are you more or less optimistic about the crisis than you were during the early acceleration period of moving to home working and adding social distancing measures?

I can see the light at the end of the tunnel. However, from a market pricing perspective, I think there will be a serious correction in equities and credit between now and then. I could be wrong – I am probably the most bearish in my team.

I think there is a big disconnect in that the equity market is currently priced for a rapid, V-shaped recovery, indicating that we will get over this quickly. This is the classic ‘don’t fight the Fed’ mantra. Maybe this is well founded but it feels very artificial to me. I think there is a lot of downside risk.

We have only seen a few large corporate failures. I expect there will be more, and this will affect bank earnings and credit more broadly. Defaults do not emerge in a week or a month. They happen over a quarter.

We probably will not see the bad data of things like mortgage defaults until June or July and this could be a lot worse than people think. There is a lot being done to paper over these cracks, but this is probably just kicking the can down the road. Potentially we will not see all the bad data until October once support is being unwound and the problems are still there.

From a governmental perspective these are tough choices. It is not easy to deal with this and I think they have made a decent fist of it. But as people we are profoundly near-term biased. If it is not today’s problem, we do not think it is a problem at all.

When you look at the history of pandemics, they typically are not over in three months. I expect there will be some significant bumps along the road.

We have been asking people what they have been reading relating to the crisis but we think everyone has seen enough by this stage. So what are your entertainment recommendations for lockdown: books, TV etc?

I have been using Audible a lot and listened to a book called Viruses, Plagues and History by Michael Oldstone, which was a very interesting account of pandemics from smallpox through to SARS.

Something interesting in this is the way the share market bounced back after the Spanish Flu in 1918. The US share market rose by over 400 per cent, so perhaps we can expect an almighty rally once we do get past this. Maybe it will be the roaring 20s all over again. There is enough monetary stimulus to create that effect.

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