In these moments of panic, it may make sense to start off with some simple facts.

The COVID-19 was first registered in Wuhan, China, on November 17, 2019. Little was done until

Wuhan, and large parts of Hubei province, were placed into quarantine on January 20, 2020. This

quarantine of Wuhan served as a global wake-up call to the scale of the disease. By late February,

Italy began to see a spike in the disease which sparked the beginnings of a sell-off across the

global financial markets. As a rather crude joke puts it: “Covid-19 is like pasta. It was invented by the Chinese, but it was the Italians that made it a global phenomenon.”

As the virus spread throughout Italy, the global financial market sell-off took off in earnest. By Monday, March 23,

the S&P 500 was down -33.92% from its high on February 20. The S&P 500 was also more than -25% below its 50-day

moving average (see chart below):

INVESTING AMID THE CORONA CRISIS MELTDOWNBy Louis-Vincent Gave, ROBO Global Strategic Advisor

INDUSTRY INSIGHTS

INFO@ROBOGLOBAL.COM | WWW.ROBOGLOBAL.COM 1

INVESTING AMID THE CORONA CRISIS MELTDOWN

INFO@ROBOGLOBAL.COM | WWW.ROBOGLOBAL.COM 2

Drops of this magnitude have only occurred five times in

history: the Great Depression—which resulted in three such

drops in 1929, 1931, and 1932—the crash of 1987, and the

mortgage meltdown of 2008. We are now living through the

sixth big equity market meltdown in just 100 years.

It’s interesting to note that such meltdowns did not occur

following other major events such as the bombing of Pearl

Harbor, President Kennedy’s assassination, the Vietnam

War, or even 9/11. The fact that a drop of such magnitude

occurred this month leads me to my first observation:

The current market crisis is more than just a COVID-19

crisis—it is a ‘perfect storm.’

Today’s crisis is the result of three driving factors coming

together at the same time to form a single, powerful blow.

1. We are currently living through fears that a global

pandemic will devastate global economic activity.

2. There are genuine concerns from investors that the past

decade’s worth of large capital expenditures in the energy

sector could turn out to be worth very little.

3. A liquidity crisis of unprecedented proportions is

unfolding at a rapid pace.

THE COVID-19 PANDEMICAmid all the measures being taken to ‘flatten the curve’

and the reality of overwhelmed healthcare systems across

the globe, one fact that I am struggling to accept is the

comparison between the number of COVID-19 related

deaths in China thus far (3,300+ deaths, out of a population

of 1.4 billion people) compared to those in Italy (11,600+

deaths out of population of 60.5 million), Spain (7,700+

deaths out of population of 47 million) and France (3,000+

deaths out of population of 67 million).1 What that tells me is

that, in spite of having roughly one eighth of the population,

a much lower density of population, and better healthcare

systems, and in spite of the fact that the disease showed

up in China almost three months before it did in Europe,

Europe now has four times as many COVID-19 related

deaths as China. This massive divergence seems odd and

brings me to two possible conclusions:

a) Deaths are massively under-counted in China.

This is a distinct possibility. While nearly every person

dying of the coronavirus in Italy, Spain, or France is likely

to make their way to a hospital, this may not be the case

in rural China.

b) The Chinese population has a greater immunity to

this new virus than European populations.

On this note, it does seem that exposure to Sars-Cov-1,

the virus that caused SARS (the 2003 health crisis) does

confer a degree of immunity to Sars-Cov-2, the virus

that causes Covid-19. (This article from Diamond Light

Source does a fine job of explaining this hypothesis.)

If the explanation lies primarily with the first option, then

this is rather bad news for the Chinese economy which

many had thought, following the lock-downs of January,

was nearing the end of the crisis. Indeed, in this first

explanation, the rollover in the total number of deaths, and

the appearance that the fight against the disease is being

won, is nothing more than an illusion. In this scenario, China

is being impacted at the same rate as the rest of the world.

The second scenario, which indicates that the Chinese have,

by and large, already built up a ‘herd immunity’ to the virus,

is obviously massively bullish for Chinese assets, at least

in relative terms. After all, if China’s economy is able to get

back on its feet while the Western World is still on lockdown,

then it is fairly obvious where one would rather deploy

investment capital.

1 As of 30 March 2020

INVESTING AMID THE CORONA CRISIS MELTDOWN

INFO@ROBOGLOBAL.COM | WWW.ROBOGLOBAL.COM 3

On that note, the recent outperformance of Asian equity markets and of the Chinese bond markets is interesting, for

this is the first time in my career that a) Asian equities have massively outperformed as markets collapse and b) have

actually shown a lower volatility than the US equity markets in the midst of a downturn:

That said, it could also be true that the simplest explanation for the outperformance of Asia is collapsing energy prices.

Low energy prices are always a boon to Asian economies that remain highly energy intensive. This brings us to the

second contributor to this ‘perfect storm.’

THE ENERGY SOLVENCY CRISISAmid fears of a sharp drop in global growth, Russia and Saudi Arabia decided to embark on a price war, acknowledging

that this action would deliver some short-term pain for the global economy, but that the long-term gain would be

provided either by a dearth of new investments into renewables, an implosion of the Iranian regime (for Saudi), or

widespread bankruptcies across the US shale oil industry.

As I write, the market is obviously very concerned about the latter, for the simple truth is that at current prices (roughly

US$20/bl for crude oil, and US$1.70/btu for natural gas), numerous US energy producers will most likely go under. At

least, this is what the bond markets are clearly telling us today. Yields on non-investment grade energy debt currently

stand at 25-year highs:

INVESTING AMID THE CORONA CRISIS MELTDOWN

INFO@ROBOGLOBAL.COM | WWW.ROBOGLOBAL.COM 4

Unlike the previous two spikes in 2008-09 and 2015-16, China is not expected to embark on a massive monetary and

fiscal stimulus, which would ramp up the price of oil. This time, the salvation will have to come from within. Which

leaves us with the following possible outcomes:

• Option 1: Oil prices stay low, companies go bust, and debt holders and lenders are forced to take large write-offs.

The silver lining to this scenario is that the banks’ exposure to energy is relatively modest, if only because when the

US shale boom really took off, global banks were still licking their collective wounds from the 2008-09 mortgage

crisis.

• Option 2: In 2008-09, banks were leaned on by policy makers to take over their weaker competitors. Similarly, big

oil companies may be ‘encouraged’ to take out assets from the hands of more threatened operators. In essence,

this is how capitalism is supposed to work. In a crisis, assets move from ‘weak hands’ to ‘strong hands’ who

assume the liabilities of the weaker organizations—even as they watch their equity get stripped away.

• Option 3: Somehow, policy makers manage to reverse the trend of collapsing oil prices, either because 1) the US

imposes tariffs on oil (a possibility now being pushed by senators from oil-producing states and that we mentioned

as a possibility in our recent research paper, What Goes Around Comes Around), or 2) the Saudis and Russia

decide they have wreaked enough havoc on global markets and fear for their domestic economies, or 3) Iran

decides to act up because its back is against the wall and the Islamic Republic now has little to lose.

INVESTING AMID THE CORONA CRISIS MELTDOWN

INFO@ROBOGLOBAL.COM | WWW.ROBOGLOBAL.COM 5

At the moment, the market is obviously ‘all in’ on option 1. So a surprise on either option 2 or option 3 could have a

fairly dramatic impact on the price of many assets. Take ‘big oil’ share prices as an example: historically, share price

performances have been driven by the price of oil and long-term interest rates. As things stand, it seems that the market

has fully discounted the ‘forever’ nature of low oil prices, without simultaneously discounting the ‘forever’ nature of low

interest rates. Meanwhile, of the two, we would argue that low interest rates are more likely to be ‘more’ permanent

than low oil prices.

THE LIQUIDITY CRISISThe meltdown in the Energy sector has given rise to fears that some of the big energy sovereign wealth funds—or simply

wealthy individuals from energy producing regions—have had little choice but to raise cash in order to confront a future

with much lower oil prices. Unfortunately, they have had to so in markets with very little liquidity, which has created a

number of dislocations. Whether or not these fears are justified almost doesn’t matter as the end result is the same:

markets will stop functioning properly across the board. Regardless of asset class (equities, bonds, commodities, foreign

exchange), the number of blatant anomalies is simply too long to review here without testing our readers’ patience.

However, here are some rather telling examples:

1. We have just witnessed one of the largest surges in the gold/silver ratio on record:

INVESTING AMID THE CORONA CRISIS MELTDOWN

INFO@ROBOGLOBAL.COM | WWW.ROBOGLOBAL.COM 6

2. Municipal bonds have just sold off by almost -14% at a time when it seems almost guaranteed that the US federal

government will open the taps to ensure that no local authorities go under:

3. A number of developed market currencies have been behaving worse than emerging market currencies. The

14-day RSI on the CAD-US$ exchange rate recently stood at 7.1—an all-time low. The GBP also hit its own all-time

low, with a reading of 15, or below Black Wednesday’s reading of 15.8. Meanwhile, the NOK has fallen -22% this

month and its RSI is a tall 10, or below the level reached in the depths of the 1992 Scandinavian Banking crisis.

4. But perhaps the best indication that we are in a liquidity crisis is the unforeseen spread between ETFs and their

underlying benchmarks. Take the Vanguard BND ETF index, a $55B US bond ETF. This is basically a bond on some of the

most liquid assets out there. Yet, in recent days, the spread between the ETF and its benchmark has reached 3%:

INVESTING AMID THE CORONA CRISIS MELTDOWN

INFO@ROBOGLOBAL.COM | WWW.ROBOGLOBAL.COM 7

Now one would think that, given the underlying amounts, somebody would arbitrage away this difference and make

‘free’ money. But this is not happening.

The list of examples goes on, but the point is obvious enough:

We have experienced a liquidity crisis, and markets have stopped functioning as they should.

Now, in cycles past, when prices became dislocated, investment banks would typically step in, provide liquidity to the

dislocated markets, and make a killing for themselves in the process. Unfortunately, today, this is simply not happening. Is

that because the rules put in place following the 2008 crisis now prevent investment banks from serving that historical role?

Or because, in this pandemic age of ours, all the traders, risk managers, and decision-makers are also working from home

and are thus unable to coordinate efficiently?

Whatever the reason, confronting today’s markets, policymakers have decided to throw caution to the wind and are injecting

unprecedented levels of liquidity into the system by cutting interest rates, introducing new rounds of quantitative easing (QE),

offering new swap lines for the central banks, and more.

THREE CRISES. THREE RESOLUTIONS.Clearly, we have three distinct crises on our hands: a health pandemic with devastating economic impacts; a solvency crisis in

the energy sector; and a liquidity squeeze of epic proportions. This reality most likely means that we should be on the lookout

for different sign-posts signalling potential catalysts for a meaningful relief rally.

On the COVID-19 front, two possible catalysts would provide the market some much needed comfort. The first would be

a roll-over in the numbers of deaths in the world’s main industrial countries, not least of which would include the United

States—the country that now has more confirmed cases of COVID-19 than any other and where the number of deaths

continues to climb rapidly. This is obviously the aim of the quarantine measures that have been put in place around the

globe. Another catalyst would be meaningful progress on a vaccine or other life-saving treatment. Given the human and

financial resources being poured into this fight, and the willingness of governments to greenlight any possible solution, this is

certainly a viable possibility.

To address the Energy sector, there are many possible outcomes, though what is perhaps the most interesting is the extent to

which the market has now gone ‘all in’ for the worst possible outcome of widespread bankruptcies. This means that there is

tremendous optionality today in all energy investments (both bonds and equities) should any other outcome, such as tariffs

against foreign oil, a Saudi-Russia deal, or the Iran implosion see the light of day.

INVESTING AMID THE CORONA CRISIS MELTDOWN

INFO@ROBOGLOBAL.COM | WWW.ROBOGLOBAL.COM 8

On the liquidity front, central banks are obviously taking a ‘kitchen sink’ approach as they attempt to apply any means

available to help stabilize the financial markets. At the very least, this should help take the ‘crazy’ out of some recent market

moves. Which brings me to the short-term and longer-term considerations for investors:

1. The short-term consideration

As mentioned above, the kind of drop we have witnessed has only occurred five times before. Following are the 50-day

moving averages for each time the S&P 500 fell by 25% or more:

For investors who were willing to project themselves out two years or more, buying the S&P 500 after such declines

was almost always a good idea, the exception being in 1929 at the start of the Great Depression. Of course, back then,

policymakers followed policies that were 180 degrees from the path they seem to be embracing today. Which brings us

to the longer-term impacts of the current crisis...

2. The longer-term shifts

Policy announcements over the past couple of weeks show that policymakers in developed economies will do whatever

is in their power to avoid a collapse in production. The result will be huge increases in government budget deficits and

unprecedented expansions in money supply. It is clear that whatever ‘temporary’ government spending our Western

governments come up with will require a lot of debt issuance, and that these debts will be bought by central banks.

Meanwhile, lurking in the background is Milton Friedman’s observation that “There is nothing more durable than

temporary government programs.”

To be absolutely clear, I am not saying that current government responses are wrong. But for years, the goal of most

developed economy governments has been to stop firms going bankrupt, especially in the eurozone and Japan. That

has left us with lots of zombie companies. These new programs will now merely compound this trend. And if ‘capitalism

without bankruptcy’ is like ‘Catholicism without hell,’ it is hard to see how this will work out to anyone’s advantage.

INVESTING IN THE NEW NORMALRegardless of which path we ultimately walk, one thing seems obvious: the cost of capital will remain very low. This will

encourage companies to continue to bolster their human workforces (which are susceptible to COVID-19 and future illnesses)

with robots. Conversely, the low cost of capital may encourage a higher unemployment rate. This is precisely how the current

‘universal basic income’ (UBI) that is being discussed as a temporary measure is likely to, as Milton Friedman observed, end

up lasting a whole lot longer than most would care to admit.

3m 6m 12m 24m

10 October 2008 -0.99% -4.74% 19.16% 29.57%

19 October 1987 10.78% 14.06% 23.06% 54.23%

1 June 1931 9.25% 52.95% 121.36% 113.18%

5 October 1932 -17.04% -26.04% -18.80% 16.65%

13 November 1929 32.02% 38.01% -6.32% -39.31%

INVESTING AMID THE CORONA CRISIS MELTDOWN

INFO@ROBOGLOBAL.COM | WWW.ROBOGLOBAL.COM 9

If we are indeed moving to a world where UBI is funded by the proverbial ‘magic money tree’, aren’t cash and bonds the very

worst places to keep one’s savings? After all, every policymaker out there is busy telling us that, in the coming years, they will

be working hard to debase our currencies though massive increases in budget deficits and monetary aggregates. Against such

declarations, investors may well conclude that:

1. Policymakers may say that now, but they don’t mean it—and they won’t be able to follow through with their wild

spending plans and increases in monetary aggregates, or…

2. Policymakers may mean what they say, but they will be ‘pushing on a string’ as they try to re-ignite our economies that

are now caught in a deflationary death spiral, or…

3. Our policymakers do mean what they say, and will end up doing precisely that.

Of these three possibilities, the third looks the most likely—at least at the moment. If this is so, wise investors should prepare

for a world where interest rates stay very low for a very long time, where budget deficits continue to skyrocket, and where

the incentive for the average worker to actually go to work to put food on the table is muted by very generous government

programs. In such a world, investing in the resulting surge in robotics may indeed be the wisest move for any seeking

opportunities for long-term growth that outlasts the current crisis and those to come.

ROBO Global currently offers three innovative index portfolios, including our Robotics & Automation Index (ROBO),

Healthcare Technology & Innovation Index (HTEC), and Artificial Intelligence Index (THNQ). To learn more, visit

our website at www.roboglobal.com.