“This is a global health crisis that has now become an economic crisis and brought us into bear territory,” says Ted Durkin, managing director and Pennsylvania market head for UBS.
That’s made the current market environment, as difficult as it might be for some, unique.
Durkin says the economy was very strong going into the pandemic-incited business closings, which means many businesses and banks had strong balance sheets when the economic spigot was essentially shut off. But the disruption compelled much of the workforce out of their offices and factories, which has brought higher unemployment and disrupted cash flows.
The Smart Business Dealmakers Podcast spoke with Durkin about how the flow of capital has been affected, as well as some of the ways that investors have tried to preserve their portfolios.
When it comes to deal capital flow, Durkin says there are some very promising signals in the market. Banks and other financial institutions, he says, are strong, especially in the United States, which means there is the expectation that capital will be available. That capital, however, may move slower than before the disruption, as banks take more time to make the proper loans into the right industries.
“We have not seen a huge slowdown there yet,” Durkin says. “There will be, but the banks and financial services companies came into this with what I would call, on average, pretty fortress balance sheets, and that will help us here long term.”
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Capital flow to the individual, however, is a different topic. That, he says, is where the stimulus package and other government support come in, especially at different economic levels.
“That’s going to be something where there clearly will be capital flow interruption there, and that's where we're hoping that some of the stimulus package will help short term,” he says. “And then also get our economy back into a place where we rebound quicker than maybe other times that we've had with disruption in the marketplace.”
A new market landscape
When it comes to individual investors, Durkin says UBS financial advisers are encouraging clients to look into structured investments that displace a little bit of market risk and move it into some credit risk with a backdrop of a buy-sell strategy based off of a zero-coupon type instrument.
“That’s been very appealing to people, where they’ll say, ‘I’m willing to give up a little bit of the upside to protect myself from the downside,’” he says.
Overall, he says there’s been a flight to quality. At times like these, it’s common for people to look at oversold areas within the marketplace and hope for a huge return.
“And that can occur,” he says. “It’s possible. But what we’re encouraging is to really look at the stable balance sheets — companies that have billions and billions of cash flow on hand, have a fortress balance sheet that they can themselves weather the storm and continue to put new supply and product out there and have a stream of revenue that is consistent with their earnings stream.”
Bigger picture, this disruption inevitably will alter the market landscape. Some long-standing legacy businesses may not survive, or will look much different on the other side of the disruption, and investors will need to refocus.
“There are lot of new businesses that will form, and I think a lot of our research and our guidance has been to also look at those areas of opportunity for the next 10 years and 15 years that maybe we didn't think were going to be some of your fast-growing businesses as short as two months ago.”