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How will this crisis change companies and investments?

Our view of the future is based around the twin revolution, the bottom-up digital revolution and the top-down Green revolution.

New York City 5th Ave Vertical

by
John Redwood

in Features

27.03.2020

Yesterday was a day of relative calm. The huge commitments made by Central Banks have stabilised safer assets through the big bond-buying programmes. Some of the bad news about economies started to appear, with poor figures for French business and German consumer confidence.

US unemployment rocketed upwards, as companies there took rapid action to cut costs and conserve cash. Perversely, the US market rose strongly despite the dreadful employment news. Some buyers are still impressed by the $2tn package of alleviation just agreed whilst others expect a further massive package of measures because the news from the real economy is so poor. They take seriously the Treasury Secretary’s statement that unemployment could rise as far as 20% without big measures to offset.  Others may be hoping President Trump does find a way to get some parts of the USA back to work after his deadline of April 12th, which few of the medical advisers believe will be possible. In the USA, State Governors have powers to decide whether to institute lock down or other responses to a state of emergency, so any attempt to get a selective return to work in less affected areas will require co-operation with state governments. It is also worrying to see that New Orleans, Detroit and Chicago are now detecting an upsurge of cases, implying that it has spread well beyond the hotspots of New York and California which seem to have got it first.

Amidst the general misery of absent turnover, massive layoffs, slashed capital investment and cut dividends, some sectors and companies are struggling to keep up with large increases in demand. Food retailers need to supply more to the new army of people staying at home instead of eating out or in company and school canteens. Food producers face some extra hoarding demand and the need to switch from catering packs to retail products. Anyone offering an online service is inundated with new users, as people follow the gym online, seek their education and training online, download entertainment at home, talk to work colleagues in video conferences and attend virtual parties online. Family members want to be in touch with each other more often where they live apart. Businesses have rushed to buy office staff laptops and other equipment to operate from home, whilst many individuals have sought better smartphones or added to digital equipment to improve their abilities to live on the web.

This means that the sharp overall downturn will accelerate some of the changes from traditional business models to digital models. When the restrictions on going out are relaxed there will be many keen to get back to real cinemas, theatres, parties and tourist attractions, but some of the newly acquired habits will continue. There is likely to be more online shopping after this shock than before, more video conferences and online meetings than before, less travel for face to face conversations or events. The businesses that were losing out before the virus may collapse or fade away more quickly because of it. The prospects for High Street shopping and for retail rents were not great anyway, but they have just got worse. Companies are likely to review their past policies about travel, office accommodation and location of administrative staff in the light of their successful introduction of digital alternatives which might be cheaper in the future.  

Our view of the future is based around the twin revolutions. There is the bottom-up digital revolution which has just had a great boost from forced reliance on home-based computing and communications. There is the top-down Green revolution, which will also claim a boost by showing that air was cleaner and the world less hectic when a lot of the travel stopped. They will be wanting people to continue with changes in behaviour forced by the virus, aiming to continue more of the reduction in travel and build it into new lifestyles.

So what does this mean for share investors? It means large transfers of turnover and profit in the short term to medical and food-related businesses and to the tech companies that grow or spring up to tackle the problems created by government responses to the crisis. It means bigger debts for the other businesses that survive, and a higher rate of corporate failure in traditional businesses that have to shut up shop for a bit. Thereafter it looks likely the trend to online in everything from retail to many services will continue, boosted by the strange lives we had to lead during the period of home isolation. Airlines will still be troubled and highly leveraged businesses. Banks will be under close scrutiny again as many people will ask if they did enough to help during the crisis. There will be antagonism to any corporate excesses, given the financial pain, many will have suffered. Dividends will be lower overall and markets will give premium ratings to companies geared to these fundamental changes of business model.

There will also be big changes in the approach of governments and regulators to state debts, money creation, and involvement in economies which I will talk about next week.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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