During a crisis, investors should make it a point to think the unthinkable

INVESTING in Asia for 30 years has shown me that crises profoundly change the market landscape. So, what have I learnt from past crises?

Firstly, we need to define in an investment context what we mean by a crisis. I would describe a crisis as a period that leads to a major structural reset in policy and behaviour at a government, corporate and consumer level. This is not just a cyclical dip in markets resulting from a short-lived war (whether it be an Iraq war, terrorist attack or trade war), it is something that has a far more prolonged impact on stock markets.

In this context, I had previously only seen two genuine crises in my career: the Asian Financial Crisis in 1997/98 and the Global Financial Crisis (GFC) in 2008/09. Like these two previous events, we see Covid-19 in a similar vein. It's a crisis that will have a lasting long-term structural impact on economies and stock markets.

So, how do the Asian Financial Crisis and the GFC affect how I am making investment decisions in Asian equities today? Here are eight lessons I've learned:

1. Change your mindset

This is not about just picking up your old favourite companies at fair value. During a crisis you need to start from scratch. You need to recheck the investment case completely, given the structural changes in the environment. Scenarios must be rerun and fair values challenged and reset for new assumptions. Worst case scenarios need to be reassessed - investors should not just think outside the box but should often think the unthinkable.

2. Forget focusing on near-term profitability

Profits are just an accounting treatment at the best of times. Instead, focus on the balance sheet and cash flows. Debt can be lethal in a crisis, even in small doses. So, the structure of debt including maturity, covenants and who are the company's bankers are key.

3. Be wary of most bank shares

Banks by their nature are the most leveraged businesses listed on stock markets. Leverage and a crisis don't go well together. In addition, even for better banks, non-performing loans will come with a lag (as will the rights issues), and on top of this, in a crisis, banks can become political hot potatoes. As the GFC and Asian Financial Crisis proved, with a few exceptions, weak banks tend to disappear/become zombies and even the better banks are slow to recover.

4. Countries with string institutions tend to recover more quickly

Good coherent government and a well-run civil service will tend to mean confidence is restored faster and business can return to normality quicker.

During the Asian Financial Crisis, it was Hong Kong, Taiwan, Australia, Singapore and Korea that recovered the quickest, as opposed to Indonesia, Malaysia, Thailand and the Philippines.

5. Disruption accelerates during a crisis

"Necessity is the mother of invention". A crisis often allows out-of-the-box thinking to come to the fore and breaks down barriers to change. A crisis can rapidly accelerate the process of creating winners and losers. We very much see this today amid the Covid-19 crisis, with massive disruption about to hit.

For investors, a crisis means we need to review all our investments as disruption accelerates. What is the future of commercial property, banks, airlines, infrastructure owners (that is, those companies with large fixed assets) in a crisis-driven, disrupted world? Our past experience of crises suggests many companies' business models need to be reinvented if they are to survive. Nimbler, asset-light companies often do better.

6. Zombies will rise

In a crisis, governments will often intervene to stop markets clearing, especially in those sectors deemed "strategic". This often leaves lots of zombie companies. This was the case for Korean shipbuilders, Thai property, the Korean construction sector and most of corporate Malaysia post the Asian Financial Crisis. The lesson for investors is to avoid investment in sectors that don't "clear" or haven't been allowed to clear by governments.

7. Always buy a good business at a fair price

When you have done your analysis and decided which businesses are likely to come out of a crisis stronger, don't be overly greedy on the price you are willing to pay for it. The key is to not continually reduce your desired entry level if the share price gets to your initial target unless the facts and the investment case have changed.

8. The impact of a crisis can linger for longer than you think

After the GFC, the sluggishness of corporate investment, populism and a desire for less free market capitalism have all been permanent features. After the Asian Financial Crisis, an aversion to debt became permanently ingrained across much of corporate Asia. This should be positive for the Asian corporate sector during the current crisis. Asian corporates are more lowly geared than those in the West, so hopefully can weather the storms better.

But because a crisis is structural, it takes a lot longer for stock markets to recover than at other times. Stock markets remain vulnerable and investors twitchy, particularly if a crisis accelerates disruption, creating winners and losers.

Investors shouldn't feel the need to chase market rallies during a crisis, unless they believe the bulk of the crisis period has passed.

• The writer is Schroders co-head of Asian equity alternative investments