17/08/2020 - 14:15

Scenario Planning reveals four potential worlds for investors in COVID-19 fallout

17/08/2020 - 14:15

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As investors reflect on rebalancing portfolios and assessing risks, many are understandably eager to get clear predictions around what COVID-19 means for investment in Australia.

Photo by Nathan Hurst on Unsplash]

As investors reflect on rebalancing portfolios and assessing risks, many are understandably eager to get clear predictions around what COVID-19 means for investment in Australia. Pandemic predictions aside, there is a strategy that helps investors and businesses alike understand what’s ahead, what threats we may face, and what opportunities we can unearth.

When looking to make predictions about the future state of Australia, it’s easy to start with some broad-brush assumptions. For example, one could determine that healthcare employees, public servants, miners, and farmers will be less affected whereas aviation, travel, tourism, hospitality, and retail employees will be most affected. Unfortunately, that sort of thinking tends to generate a single prediction and narrows the thinking. 

Generating shared sense making

A more beneficial approach lies in scenario planning: considering a series of scenarios, each a plausible and relevant future, and building worlds around them. Guided by founding director Thomas McClung, Dorado Property began this process early on, as the first signs of what was to come began to appear.

Involving every staff member in the company working over an extended period to discover many possible outcomes for the economic and health impacts of COVID-19, we generated shared sense-making amongst the plethora of articles that were published daily.

For example, in building different scenarios, one can vary six key variables to generate four potential worlds:

  1. Will COVID-19’s effective reproduction number (RE) stay below, at, or above 1.0?
  2. Are intensive care beds plentiful, tight, or overwhelmed?
  3. What is the duration and form of JobSeeker, JobKeeper and other government stimulus?
  4. What level of social distancing is mandated and how compliant is the public?
  5. How effective are the authorities at testing and tracing? And
  6. When is a vaccine or effective treatment readily available?

Four plausible Australian landscapes

Creating these worlds requires significant imaginative effort, down to even creating a series of headlines we would likely see in each scenario. The worlds that resulted were complete, whole, and tangible; able to enlighten us as to what signposts to look out for and guide decision making around various measures if that scenario were to unfold.

On a broader scale, measures included new overseas migration, levels of consumer and business confidence, rates of unemployment, numbers or corporate insolvencies, infrastructure spending, and rate of interest rates and inflation.

More specifically to the property industry, measures such as median property prices, volume of listings, number of days on the market, dwelling approvals, rental yields and, in the eastern states, auction clearance rates were closely tracked. Such factors help to not only judge the health of the industry, but also paint a picture of how the competitive landscape would likely change, and appropriate products and businesses with it.

Within this scenario, the worlds that formed ranged from a worst case ‘COVID Winter’, where a community transmission-led second wave overwhelmed the country and the economy entered into an ‘L-shaped’ recession, to the ideal case ‘Lucky Country’, where a minimal second wave saw the population’s health recover and stabilise, and economic activity restart after a brief ‘V-shaped’ drop. Perhaps the most realistic scenarios are produced by the two worlds that fall in between these extremes; scenarios where either health or economy fare well, while the other encounters hurdles.

Safeguarding investments against global uncertainty

This task is mind-bogglingly complex and is only seen through a domestic Australian lens. Though prospects of a global recession may have COVID-19 front and centre, other issues such as global supply lines, a bellicose China, US elections, trade disputes and more countries with nuclear ambitions all make the prediction business feel somewhat fruitless.

The truth is, no one knows what is going to happen, but the period of analysis and reflection triggered by undertaking scenario planning makes everyone far better prepared to both make and manage investment decisions in an evolving climate of uncertainty.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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