Keeping Momentum

Christophe Reech, Group Chairman and CEO

Over the best part of nearly three months, the world has been on a journey of hardship. With deaths now over 430,000 and cases still rising in many countries, humanity has faced one of its principal challenges to date, and certainly the largest since the Second World War.

The impact of the crisis on society and economies has been staggering. In some of the world’s largest economies, we saw unprecedented collapse in productivity, manufacturing and consumer spending. Industrial production in Japan fell by 9.1 percent in April, while in Germany, Europe’s largest economy, retail sales plummeted 5.3 percent in April, 20.2 percent in France, 31.6 percent in Spain and 18.1 percent in the UK (Office Government Sources for April (published 29 May), ONS).

Life, at the end of the day, will win. We will see growth again; we will see success.
Christophe Reech

Every industry has been affected in some shape or form. UK car manufacturing was down 99.7 percent in April (SMMT). European airlines lost out on $89 billion in revenues this year, as of 23 April, because of the virus impact (IATA). The OECD predicts that the global tourism industry could contract by between 45 and 70 percent as a result (ILO Sectoral Brief, April 9 2020).

The beginning of March 2020 saw the 11th anniversary of the longest bull run in history, value that has now largely been wiped out, with extraordinary volatility in asset pricing becoming a reality (Business Insider). The momentum and trajectory of financial markets at that time could not be argued with. Any seasoned investor can tell you stories of boom and bust, and importantly, how markets always recover and move back onto the trajectory that they were on.

I’ve now experienced 30 years of market cycles, crashes, successes, and failures. The one lesson I’ve learnt through all this is that humans can adapt, adjust and move back to their pre-crisis trajectory. Life, at the end of the day, will win. We will see growth again; we will see success. Who knows if things will be precisely the same, it’s too soon to tell, but things will get back on track.

Like all governments, businesses, societies and families touched by this crisis, Reech Corporations Group has too been on a journey. We had to adapt quickly, and we have pivoted to focus on the future and the opportunities that it holds for a business like ours. I laid out this thinking in my note on this as the crisis started to engulf us.

Now, as we arrive at the juncture when restrictions start to ease and we start to see some semblance of light at the end of the tunnel, I wanted to share my thoughts on what has happened over the past 8-10 weeks, and what the future looks like.

Dealing with the inevitable

The most critical aspect to handle first was ensuring our employees were protected.

For all businesses, and ours is no different, the most critical aspect to handle first was ensuring our employees were protected, were well looked after and had our unconditional support.

The first phase of this was about continuity, and for a business like us this means infrastructure. We ensured that all our staff had the right hardware and set-up to continue working remotely and this wouldn’t impact our focus and productivity as a business. This includes sending equipment to our employees around the world and giving them advice on how to get established for working throughout this unknown period.

Secondly, as a management team we focused on staff morale, mental wellbeing, and coordination. We invested heavily in making sure the team was happy, motivated and well connected. This is not as easy as one would think – we have always recognised that our people are our success, and ensuring they felt happy, secure and part of one integrated business, despite being physically separated, was hugely important.

Over this challenging time, we have seen productivity and motivation increase, with a specific spike in peoples’ sense of ownership. As a result, our team now has a strong understanding of all aspects of our business, ranging from our IT support team, deal and investment through to management level. It has been an exciting and educational time for us all.

From this, we have been able to strategically focus on deal flow, which I feel makes us stand out differently at this time from other investment businesses. Many firms have been focused on managing their existing portfolios, and while this remains a critical focus for us, what has been important is to look beyond the crisis, and to grab the opportunities that it presents to a business like ours.

For many in the business, there has been a sense of striking back against the impact of Covid-19. People have been strongly motivated to not let this get in the way of what they want to achieve as individuals, or for us as a business. Our team has been driven to ensure that nothing will stop us, and people now really believe that they can achieve whatever they want to achieve.

Our passion and focus – our fighting spirit – have only gathered momentum during this time, as we’re seeing that we can achieve whatever we want to achieve.

A true pragmatism, a fighting spirit, around deal-making has been the outcome of this mentality. Passion and focus have remained unfazed and only gathered momentum during this time, with our team spotting the opportunities with laser-like precision and acting upon them.

While we are not out of confinement yet, and the trajectory of the virus is still where it is, many of the regions we operate in are starting to shift back to a normal way of working, and we are slowly, and cautiously, thinking how we move people back to the office. While we want to move back to pre-crisis ways of working, I know that the spirit that has emerged during this time will remain, as everyone sees the value that it can bring.

What we have seen is the epitome of true entrepreneurial culture start to emerge. We want to bottle this, and apply it to everything we do going forward. I only have our team to thank for this as they are the ones who grabbed the opportunity and implemented this to their work. They faced a real test and have only emerged stronger as a result.

The scenarios we see

The big question is what comes next? Inevitably, there will be a second wave. This assumption, as many governments are predicting, is unavoidable, with simple mathematical projection showing what this will look like. For example, if a third of the population starts to return to their workplaces, there will be an increase of course, but in relative terms, the effective reproduction number of the virus naturally decreases and spreading starts to slow down (The Times).

Importantly, any second wave should be easier to contain, and the reason why is that humans can adapt; while the handling of this crisis has been inconsistent across the world, the response has shown adaption on many different levels.

The first scenario we’ll expect is unemployment on a large scale, as the true impact of Covid-19 starts to bite. We’re obviously already seeing huge proportions of the workforce sign on to jobseekers’ allowance, many for the first time. However, while jobs will be lost, new jobs will be created as new skills emerge and new sectors have proven themselves to be resilient and core to the recovery.

Secondly, we’ll see a scenario where assets are re-priced. This happens after any crisis. It’s a given and the main question is how fast this happens, and how quickly capitalisation catches up with the underlying assets.

Thirdly, we’ll see some businesses fail, and some businesses succeed. Recovery is always asymmetrical, we never see it across the board, and we will see different levels of success and failure. Importantly, new types of business will emerge, as will new types of technologies. Any recovery is never textbook, but we will see recovery.

Finally, there will be a scenario that plays out where the fiscal hammer comes down on the support given by governments during this time. Government spending has hugely increased and eventually this debt will need to be repaid. European think-tank Bruegel has calculated that by 25 May 2020, additional government spending for Germany increased over 10 percent, for the UK nearly 5 percent and over 9 percent in the USA, leaving a deterioration in budget deficits without any plan for direct compensation on this (Bruegel). Enhanced fiscality will need to kick-in, and while the picture isn’t clear on what this looks like, new measures and approaches will have to be adopted to account for the deficit.

The opportunity ahead of us

These scenarios will of course be a challenge for everyone, however for us our entrepreneurial spirit will continue to shine through. We are well positioned across these scenarios and ready for each and every eventuality, should they happen.

“Our entrepreneurial spirit will continue to shine through.”
– Christophe Reech

We have already seen a strong move to safe-haven assets as investors flock to shield themselves from the impact on financial markets. An example of this is the Swiss Franc, where we have seen, again, it has proven itself as a safe-haven currency, something our team at Stone Estate Swiss wrote about at the end of May.

Like I said earlier, assets will be re-priced. In real estate, mass defaults on mortgages and foreclosures are inevitable, although with various degrees of magnitude and velocity depending on countries or sectors, with special situations and value-add investment opportunities a clear way for investors, asset owners and occupiers to navigate through uncertainty and challenges. There will be a range of opportunities for us as an investment group and we are poised to jump on these, and in many cases, we are already far along in discussions, negotiations or even structuring.

In financial services, the industry is on the front line of what’s to come in the next 6-12 months. Asset management AuM and returns will be severely impacted as assets are repriced, mortgage banks will have to deal with defaults on a massive scale, and insurance firms are already starting to handle record claims with significant impact on premiums.

We will also start to see major restructuring of financial instruments as activity impacting the price of underlying assets, and defaults, impact products designed specifically to ride out turbulent markets. We have the expertise to assist, advise and step in as principals with this kind of restructuring and helping counterparties mitigate disaster during the recovery phase, by aligning them with our capital.

Throughout this time, we have been on hand to help, and have been actively speaking with governments, investors, portfolio companies and other corporates to ensure they have the tools, advice and capital on hand to steer them through these stormy seas.

What has been clear through this crisis has been society’s dependence on technology. To deliver remote working on a massive scale. To track and stop the virus. To deliver aid and support. And to find solutions where many thought they couldn’t be found.

Technology will show us the way forward and is where I expect there to be a huge amount of investment, advancement and growth going forward. While technology alone won’t be the silver bullet, Machine Learning, Artificial intelligence and Big Data, combined with human adaption and resilience will be the key to beating this virus, and will define the path to recovery while introducing new models for the post-Covid world.

As we encounter challenges in different sectors, be it real estate, financial services or other corporate sectors, this combination of human spirit, and new technologies, with help to crystalize and accelerate opportunities for all.

Technology will show us the way forward.

Technology will show us the way forward and is where I expect there to be a huge amount of investment, advancement and growth going forward. While technology alone won’t be the silver bullet, Machine Learning, Artificial intelligence and Big Data, combined with human adaption and resilience will be the key to beating this virus, and will define the path to recovery while introducing new models for the post-Covid world.

As we encounter challenges in different sectors, be it real estate, financial services or other corporate sectors, this combination of human spirit, and new technologies, with help to crystalize and accelerate opportunities for all.

Christophe Reech

Group Chairman and CEO
Reech Corporations Group

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