Risk Wire: Covid-19 – What Is the End Game?

We consider two likely exit scenarios of Covid-19 pandemic and the world economy, but without a need to select one. A blueprint with early data signals will guide institutional investors and help them decide when (and IF) to switch from the “bad” scenario to preparing the portfolio for the “really bad” scenario.

The spread of Covid-19 disease globally tests the limits of the usefulness of conventional statistical models for building expectations with regards to the financial markets. Indeed, if the nearest equivalent to this virus is the 1912 Spanish flu epidemic, there is very limited or no relevant data to guide us. Given the lack of historical precedent, we build scenarios using Mira’s Agent-Based Modelling, which is more suitable for cases, when available history is not relevant.

In this issue of Risk Wire we develop two broad directions (scenarios) in which the sequence of events can take us, building up from the industry-level information and covering both supply- and demand-side impacts. Beyond the two scenarios, we also examine the likelihood of outcomes that are currently in the spotlight of our institutional clients and the general investment community, such as for instance stagflation. We then conclude with some remarks about certain investment cases we believe are either “hyped” (gold) or overlooked (the likely impact of the specific geographical spread of the virus). The latter could turn out to be a decisive factor in switching between scenarios and building a contingency plan specific to the fund.

The two scenarios are introduced for Mira ABM users and available on the platform:

  • LINKS Covid-19 Scenario A (the “mild” outcome), and
  • LINKS Covid-19 Scenario B (the severe outcome)

The scenarios differ in the extent of “lock-down” that it takes to fight the corona virus, or rather the number of the required “lock-down” cycles that may be required. Industry-level supply- and demand-side effects of the range of scenario outcomes will help to adjust institutional portfolios in order to limit the risks and position for any recovery.

Run Economic and Geo-political Scenarios

Explore how Agent-Based Models (ABMs) can be used to run stress tests and scenario analyses.