We are currently in the midst of the deepest global recession in 90 years with countries of around 50% of global GDP in lockdown. The collapse in commercial activity is far more severe than in previous crisis, because we never experience a sudden, government-ordered stop. Currently, it is impossible to foresee the magnitude and length of the crisis, because it largely depends on political decisions around the gradual exit of the current lockdown measures. Most government depend on scientific opinions from epidemiologists and virologist around the future path of new Covid-19 infections, tracing capabilities and capacities of healthcare infrastructures. Also, there is an increasing pressure from economists and business leaders to lift the lockdown due to the economic hardship that cannot be endured for much longer without causing a greater depression. The good news is that, unlike in the Great Financial Crisis, many countries and especially the United States, have responded extremely quickly with absolutely unprecedented monetary and fiscal stimulus, that should help to prevent the worst-case scenario. On the other hand, some countries, especially in the developing world, have less financial muscle to support companies and workers that have lost their income, which might lead to a much slower and fragile recovery.
Maybe, it is more important to analyze the longer-term impact of the current crisis on countries, industries and businesses, rather than trying to time the bottom in the stock market, which is too difficult a task. In our view, the current health and economic crisis will fundamentally change consumer behavior and the business climate. One of the most obvious changes is the even faster adoption of new technologies. In the last weeks, we all experienced an intensive crash course in home schooling, remote working, e-commerce, digital payments, etc. Even once shops, banks and restaurants reopen, we might think twice if we really want and need to visit them. Most likely, health and environmental concerns will make us more adverse to be stuck in traffic, crowded public transports and waiting lines. Therefore, the trend towards e-commerce and digitalization is most likely going to be even stronger after the crisis. At the same time, supermarkets, shops, restaurants, hotels, airlines, amongst others, will have to deal with stricter health protocols, that might reduce foot traffic and capacities.
Another concern of the current crisis are supply chain disruptions. Many years of globalization, specialization and lean supply chain management have increased the complexity of supply chains. Factory closures, border controls and other trade frictions can cause shortages and delays, even if only one particular country was affected. This was first felt with the Chinese lockdown, and later Italy’s lockdown. Governments and companies will tolerate less risk, especially in strategic important industries, such as medical supplies and national security. Unfortunately, the current health crisis is also a fertile ground for nationalism, or even conspiracy theories. Therefore, the process of de-globalization that started with the rise of trade frictions in 2018 is likely to intensify. There will be a trend towards onshoring and proximity sourcing. Firms will seek bigger safety buffers and a critical mass of production close to home using highly automated factories. Global firms might become less profitable but more resilient. Robotics and automation providers might benefit from this trend.
Finally, it is worth looking at the financial sector. The good news is that unlike in 2008, banks cannot be blamed for the crisis. Also, the industry went into the crunch in decent shape with relatively strong balance sheets, particularly in the United States. Nevertheless, the sharp recession will hit the banks’ profitability and blast another hole in their balance sheets. They might be able to digest it, but their lending activity after the crisis might well suffer. Therefore, we expect that banks are likely to retreat even more from lending to small- and mid-sized enterprises. This creates unique opportunities for the private lending industry. Smaller companies and are willing to offer strong guarantees and pay relatively high rates to private lenders that are willing to replace traditional banks.
Not everything in the crisis has been bad. The earth has been able to breathe, cleaner and fresher airs circulate and even passersby have been seen who invite us to reflect while human beings are in quarantine. Although the relief is temporary, investors will further question the impact of their investments on the world. Therefore, investments taking into account factors known as ESG (Environment, Social & Governance) take greater relevance. The returns of this type of companies can become more attractive because by complying with these characteristics they avoid legal and / or reputational problems.
In conclusion, we expect the recovery to be slow and bumpy, but it will come and the crisis will pass. Businesses, advisors and investors that had a conservative management before and during the crisis and that are flexible enough to adapt to the new megatrends, are likely to emerge much stronger.