My article of a few weeks ago about the coronavirus already seems to have been overtaken by events…
For example, I noted the significant decline in the stock price of various entities, and said:
- My intention here isn’t at all to discount the individual cases of loss and anxiety caused by the virus, but rather to wonder what this says about the stock market’s supposed all-seeing rationality. At least as I write, there’s little or no indication at present that any major company’s customer base is likely to permanently shrink by 5% or 15% or whatever as a result of this. The main challenge, it seems, is to certainty and confidence.
Although the last sentence is still more true than not, the economic upheaval of the virus is plainly greater than I assumed it would be. Whether or not the customer base of, say, airline companies will permanently shrink by those percentages, it seems they may do so for a long enough period that stock prices can’t help but respond. And as I write, at least one airline (albeit not a “major” one) has been driven entirely out of business. So I may have been guilty there of understating the threat we’re currently living through, by misconstruing the virus’s greatest threat, its creeping existentially-charged uncertainty. As Niall Ferguson put it: “A pandemic is very different from a bank run, to be sure. But in each case we witness the same phenomenon, which is characteristic of a networked world: a cascade of consequences driven by fear of the unknown.”
Returning to the primary mandate of this blog, this comment is worth revisiting:
- …such events can make it tough to keep faith in the concept of informed long-term investing based in part on careful analysis of financial reporting. What’s the point of trying, you might ask, if the carefully assessed asset allocation decision you make today can be dramatically undermined by next week’s colourful crisis of confidence?
Whatever your gut feeling might be about the ultimate impact of the current crisis, it’s certain that it’s not the worst thing that will ever happen in most of our lifetimes. There will likely be even deadlier pandemics, and (whether or not related to that) greater economic downturns than we’re currently living through, and greater waves of technological upheaval and, most inevitably, the impact of climate change (which, based on evidence to date, will be handled with far less coordinated resolution than we see applied in our present moment). With all of that, the degree of implicit optimism involved in making any rational-seeming assessment about the future predictability and sustainability of the investing returns on any particular entity will likely be more than most of us can sustain. I become more and more convinced that this is the main issue demanding the attention of the IFRS Foundation, dwarfing any foreseeable benefits of (say) tinkering around with defining income statement subtotals…
Anyway, as I said before, these events arrive at a tricky time for calendar-year-end reporting, in that their economic impact arises for the most part in 2020, constituting non-adjusting events. That might sound fortuitous, but constitutes a double-edged sword if it means that an impacted entity’s year-end report is in danger of appearing instantly obsolete. It seems to me that just as people still cite the 2008 financial crisis in criticizing various aspects of IFRS, they may recall our current moment as a prime example of why the old model of delayed periodic reporting is stagnating.
In the meantime, organizations such as the UK’s Financial Reporting Council are encouraging companies at least to address the issue in their disclosures. A Globe and Mail article from March 4th (a few days ago as I write, and yet an eternity) noted:
- Dozens of Canadian businesses have included new disclosures in their financial reports that outline the impact coronavirus could have on their operations, offering early insights into the growing risks that could affect profits if the outbreak worsens…
- The answer on what, if anything, to disclose is…changing rapidly.
- “The situation is so dynamic and moving so quickly,” said John Valley, a partner at Osler, Hoskin & Harcourt LLP. “If you put out your MD&A six weeks ago, for example, you might not even have mentioned this because it just legitimately was not on your radar. Increasingly, it’s hard to look at coronavirus and think, ‘Well, how can I say nothing at all?’ ” However, he noted the specific impact is difficult to predict. “People aren’t putting numbers to it yet at this point, from what I’m seeing.”
The article ends on a relatively positive note, quoting one observer as saying “Most companies that we’ve spoken with are quite confident in their own abilities to deal with it.” But at least to this point, confidence has been the virus’s easiest victim…
The opinions expressed are solely those of the author