Businessmen are skeptical looking at stock market charts.
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The Covid-19 pandemic has created all kinds of problems for investors trying to gauge market risks.

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Economies are reopening with mixed results — soaring infection rates in certain U.S. states have forced governments to pause — while equities remain on a tear since their March trough.

John Goetz, portfolio manager and co-CIO at Pzena Investment Management in New York, said the uncertain economic outlook makes it difficult to evaluate risk.

“Do you look at risk as the volatility in the stock price?” he asked in a late-May interview. “Or, do you look at risk as the probability of losing the value of the business? And there, I’m talking about permanent capital impairment.”

Goetz, who co-manages the Renaissance Global Value Fund, pointed to travel companies such as cruise line Carnival.

“They’ve been really hard hit and they’ve already gone to the market to raise capital, both equity and debt, because their cash flow is so bad,” he said.

Companies that go bankrupt or need to raise massive amounts of capital may face “permanent capital impairment,” with new equity squeezing out existing holders.

But the economic shock from the pandemic, which Goetz likened to the Great Depression, has also created bargains. There are companies hit by the downturn in demand whose balance sheets are steady enough to see them through the crisis, he said.

“We are very, very careful in looking at the range of outcomes [for] each of the companies that we’re looking to invest in to make sure that they have the liquidity and the capability to survive a very significant economic shock,” he said.

“We call this downside analysis.”

Goetz said he’s not trying to forecast the duration of lockdowns, but examining the downside case for individual businesses should take into account the impact to liquidity and cash flow of further disruptions or a second wave.

“This is a critical part of managing risk right now in our portfolios around the world,” he said.

Goetz pointed to two German companies as being able to survive the uncertainty ahead.

Chemical company BASF suffered a downturn in demand even before Covid-19, when China’s auto sector slowed last year, he said. It was hit again by the pandemic, but Goetz said BASF is positioned to pick up market share in a recession.

The company’s balance sheet “enables them to make it to the other side of this very horrendous event, whereas some of their competitors might not,” he said.

The other firm is automaker Volkswagen. While some competitors are receiving government support, potentially leading to large, public stakes in the company, Goetz said Volkswagen has a strong balance sheet and is positioned to be a leader in the electric vehicle market.

“This is an opportunity to pick up leaders in the space like automotive, and we think Volkswagen is the next example of a very under-priced company with a leadership position,” he said.

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