COVID19 – INVESTORS: We have nothing to fear but fear itself

I have received a number of calls from existing and potential investors in Uganda and UK who want to know what the effects of the Coronavirus will be on the economy, and their current and future investments. I have resisted sending out a summary and advice till now but colleagues and clients have requested that I do so. Here goes!

Coronavirus Global Financial effect

Clearly the impact that the COVID19 pandemic will have on the world economy is huge. The effects of a de-facto travel ban, a collapse in investor confidence, the end of an 11 year bull market in shares, and the effects of financial support from national banks via interest rate reductions and quantitative easing will be huge in macro-economic terms. Many commentators suggest that the virus will be what forces the next worldwide recession (which is overdue) and I would agree with them. It is likely that the current low bank rates for established currencies will therefore continue for the foreseeable future. In some economies the worldwide reduction in travel and tourism coupled with existing systemic fiscal problems in their own economies will mean that the effects of this crisis are very severe. More established economies will contract and there will be some pain but this was coming anyway. Certainly any sort of investment into stocks and shares would be risky beyond belief for the foreseeable future. Similarly bank investment will be very unrewarding for the next 2 years (as it has been for the last 10 years!)

Coronavirus Investor effect

Both boom and bust offer opportunity for investors. The first casualty in a recession or a crisis is confidence and it is likely that a lot of investors will do nothing for much of 2020. Inflation will drive down the value of bank savings. In Uganda the Ugandan Shilling is also going to lose value against the US Dollar. Doing nothing is therefore not a good strategy. In periods of turmoil such as this you should avoid:

·         All stocks and shares investment

·         Speculative investment – COVID19 adds a degree of uncertainty that now makes most of these unviable

·         Currency trading particularly if leveraged

·         Investing in anything directly linked to Coronavirus

·         Disposing of assets – it is not a seller´s market

Coronavirus Investment Owl Partners effect

We have re-analysed all our current investments and spoken to the money managers at those investments. The big benefit to nearly all our most popular investments is that they are NOT speculative – the term of the investment is fixed; the return on the investment is fixed; the contracts are asset-backed; the assets are held in trust for investors; and the contracts are written in jurisdictions where the law is rigorously enforced.

We can therefore assess and advise as follows on the five leading products as follows:

·         79th Luxury Living: This is a UK property business that specialises in buying properties at below market value in times of uncertainty. Clearly COVID19 is good news for such a business! The investment is fixed term and fixed return and is backed by corporate guarantees and therefore risk is in no way increased by the pandemic. Indeed, uncertainty is what this particular business thrives on.  Returns are fixed, term is fixed, investors have a first charge over assets.

·         Halcyon Developments: The reason for this particular raise was that Halcyon had sold more properties “off-plan” than expected at end of last year at the Halcyon Resort in Limoges, France. They were therefore seeking to raise finance in order to construct those additional properties. The way that they work is that they take a non-refundable deposit of 5% from buyers and then use investor money to build the properties to 35% completion before the buyer pays additional funds to clear the investors. Clearly a drop in investor confidence might mean that people who had paid the 5% deposit decided not to continue with the sale but in that event Halcyon have two alternative methods to exit you as an investor. The first is obviously to find another buyer for any free property. However, if that fails, Halcyon have a formal contracted offer from a French Bank in place to finance the property construction and so to exit investors. In other words, regardless of consumer confidence the exit of investors is assured. Once again, this is a fixed term, fixed return investment that is secured by assets and formally contracted. We would suggest that the 18 month contract is now the most attractive.

·         High Street Group: High Street Group has just been formally acknowledged by the UK parliament for its business success. It borrows money from investors only to acquire property and to gain the optimum planning permissions for that property. Investors are exited either immediately planning permissions are granted, or very early in the construction phase by the sale of the property to institutional investors. 80% of its property is sold to pension funds, financial institutions or other developers meaning that it is not exposed to risk by a global recession as it is not dependent on retail buyers. The focus of the business is building property for the UK Private Rental Sector where there is a massive shortfall of property. The fixed term, fixed return contracts have been honoured in full and on time for the past six years and investors have a first charge over £70m of assets that are managed by a security trustee.

·         Magna Hotel Development: Tourism is the industry that is likely to be most hurt by the pandemic – and the one that may be permanently changed. We expect that the number of operating airlines will be substantially reduced and that tourism will be negatively affected for the next five to ten years. This investment offered good returns and a charge over the land where the hotel was to be developed in UAE. We no longer believe this investment to be optimal. Funds are currently held in escrow under the control of our security trustee pending completion of the raise and we will be exercising our clients right to withdraw those funds in full. We will no longer be offering this investment and we expect this project to be cancelled. There will be no loss to our investors.

·         Innovative Agri-Tech Group: This is an IPO offering our investors the chance to acquire shares in a very credible indoor farming business that holds a number of patents, contracts, joint venture agreements, and has an operating indoor farm. I still like this speculative investment and expect it to return between 150% and 500% to investors. You will have seen that the pandemic is causing a shortage of foodstuffs as people panic-buy and this is probably good for the business. However it is now impossible to accurately predict a flotation date and so our estimates of an 18-60 month investment period are uncertain. You should be willing to hold for longer before investing in this.

We live in difficult and challenging times. But fortune favours the brave. As Franklin D Roosevelt said way back in 1933:

“Let me assert my firm belief that the only thing we have to fear is…fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”

We are here, as always, to give independent, impartial advice on any aspect of investment – whether you are an existing or prospective client; and whether the investment is one we have identified for you or not.  Get in touch here