COVID-19 and Financial Markets: Part III


After several weeks of extreme volatility, the most dramatic crash in the history of financial markets and partial recovery, Les Nemethy asks: Where can we expect financial markets to go from here?

 How should you allocate your assets to help withstand further volatility in the coming months? In my opinion, the course of financial markets is highly dependent on the course of COVID-19, and how governments and media respond; hence, let me first provide my latest thoughts on this subject.

The world is about to witness the most horrendous months of pandemic witnessed since the Spanish flu in 1918. While Italy may be peaking, (after weeks of lockdown and more than 10,000 deaths), new hotspots are rapidly emerging in Western Europe and the United States.

In the States alone, where containment has failed, there could be 70 million to 150 million people infected with COVID-19, according to a report from March 11, which could mean 1 mln-3 mln deaths.

Countries such as India and Indonesia are now ramping up the geometric curve where absolute numbers of cases are becoming very significant. These countries have higher population density, lower hygiene standards, fewer medical facilities, and hence the toll in lives could be enormous.

There is still much we don’t know about the virus. The biggest question mark is the mortality rate, commonly estimated by most health authorities at 2-2.5%. We have accurate hospital statistics on the number of people who die from COVID-19, but very unreliable information on the number of people infected, which is massively underreported.

In most countries, only symptomatic cases are being tested, and even that is not always the case. If many more people are infected than realized, we reach herd immunity faster than expected. That does not take away from the reality that there will likely be hundreds of thousands if not millions of people dying in the coming months from COVID-19 in the United States and Western Europe.

Not to minimize the humanitarian devastation caused by COVID-19, but we suffer more than a million deaths from each of car accidents and regular flu every year, yet the world economy does not miss a beat. It is lack of preparation and poorly thought out strategies of governments that magnify the economic damage, according to a piece titled “COVID-19 Derangement Syndrome: A World Gone Mad” on

‘Dead Cat Bounce’

My own belief is that the partial recovery of equity markets last week was a classic “dead cat bounce.” The good news of last week’s massive monetary and financial stimulus caused the bounce, but the stimulus is already fully priced into markets. The coming bad news is probably not.

It is unlikely that the Fed’s monetary and fiscal bazookas will solve the economic devastation caused by the virus, nor quell the panic and disruptions from loss of life. It can only provide some relief through liquidity. Over the coming months, the combined effect of death toll, lockdowns, associated panic, and unforeseeable knock-on or domino effects, will likely take market indexes lower, possibly significantly lower.

When looking at domino or knock-on effects, just the existing damage done to the global economy and financial system to date has the potential to unleash mass bankruptcies (restaurants, hotels, etc.)

What about the ability of the Italian banking system to withstand the lockdown? To what extent will supply chains fail in this period of reverse globalization? What chance is there that a country hostile to the United States takes advantage of its weakness, going on a land grab or starting a regional war?

The possibilities are endless. We have no way of knowing what these domino effects may be, and they are not priced into markets. In my opinion, all bets are off. We are in a financial and economic storm without a compass. There is nothing financial markets dislike more than uncertainty.

So, how should assets be allocated over the coming months?

Cash: If you can afford it, have enough cash on hand to cover personal or corporate overheads for several months as a form of insurance.

Gold: This is the classic “safe haven” asset. While it was sold off during the recent market crash, this was probably due to margin calls and a massive need for liquidity. Gold may be positioned for a breakout in the coming weeks. I personally have one third of my modest portfolio in gold-related assets: 10% of that in physical gold (coins), 30% in gold mining shares, 10% in a gold ETF, and 50% in gold royalties (Franco Nevada, FNV).

Debt: There is a distinct possibility that massive amounts of stimulus will lead again to inflation. As interest rates tend to rise during inflationary periods, to the extent you need debt, try to shift it to fixed interest rate debt. During periods of flight to quality, further appreciation of U.S. Dollars, Swiss francs, etc., may be expected. Holding debt in emerging market currencies would likely be better.

Equities: Domino effects may severely effect certain types of equities (e.g. banks). Nevertheless, the most astute investors will be able to find winners in this difficult environment. Look at Amazon hiring 100,000 workers, or companies engaged in viral drug research.

Massive fiscal and monetary stimulus may very well reignite inflation in the medium to long-term. This reinforces the rationale for gold, and suggests we not hold too much cash. Long-term fixed rate debt, particularly in weak currencies, may well deflate in value over time, should inflation kick in.

Our next blog will deal with the M&A environment in the coronavirus era.

Disclaimer: The information, data, and analysis in this article should not serve as advice for any investment decision. Neither Euro-Phoenix Ltd. nor any of its officers and directors make any representations or warranties, express or implied, as to the validity and/or accuracy and/or completeness of the information set forth in this article.

Les Nemethy is CEO of Euro-Phoenix (, a Central European corporate finance firm, author of Business Exit Planning ( and a former president of the American Chamber of Commerce in Hungary.

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