Like a metal door closing shut, the global virus pandemic has silenced the steady hum of commerce. Lockdowns have halted businesses and schools, disrupted supply chains, closed airports and stopped air travel. As streets from Manila to Mumbai turned eerily empty in what would have been congested daily traffic, photos shared on social media instead were of picture-perfect magnificent blue skies of city views never seen for some time.
China’s release of its first-quarter GDP growth number – a decline of 6.8% – foreshadows the scale of economic destruction brought on by lockdowns that will be mirrored globally. The International Monetary Fund revised China’s 2020 growth rate to 1.2% from 6.1% in 2019, with Chang Yong Rhee, director of the fund's Asia and Pacific department, predicting zero growth for the region and describing the impact of the coronavirus on it as “severe and unprecedented”.
Tragic as it has been, and still is, given the grim death toll, this global health emergency, however, has been a breath of fresh air for the environment. Carbon emissions are set to register the biggest annual drop on record, more than during any previous economic crisis or period of war, according to Carbon Brief, a UK site focused on climate science.
As the lockdowns are lifted in phases over the coming months, companies looking to restart will be picking up the pieces of a shattered business outlook. As the earnings season begins, talking about profit forecasts for the year with unreliable earnings-based valuations is going to be a waste of time. In fact, the dispersion of analysts’ forecasts is the highest on record, according to Marija Veitmane, multi-asset class strategist at State Street Global Markets.
As investors have pulled back, cash levels are at record levels. According to a survey of fund managers conducted by the Bank of America in April 2020, they are at the highest since the 9/11 terrorist attacks. With the majority of fund managers surveyed pointing to a recession for the year, their allocation to equities are also at the lowest since March 2009.
Companies, in the depths of this crisis and planning for what comes next, have an unusual opportunity to look beyond the narrow focus of how to meet this year’s growth targets. Even their financial stakeholders don’t expect much, if anything at all, given the widespread dislocation. “Investors’ time is much better spent looking at infection/active virus cases for any signs of a possible re-opening of the economy,” Veitmane reckons.
Instead, companies that are thinking about broader stakeholder interests will emerge in much better shape. In the post-pandemic world, companies will need to do more to fully demonstrate how they are serving the wider interest of society.
For environmental, social and governance (ESG) issues, “it is a watershed moment,” shares Paras Anand, chief investment officer for Asia-Pacific at Fidelity International. “What becomes extremely visible at a time like this is how companies are thinking about their broader stakeholders and issues related to sustainability. Even how companies think about their balance sheets, the way that brands resonate and connect with their customers become even more acute at a time like this.”
Indeed, questions are starting to be raised on what Richard Yetsenga, chief economist at ANZ, describes as the “excessive optimization in the private sector”. In a recent note, he shares: “Regulators focused on the banking system after the financial crisis [in 2008] and, outside of a handful of other specific sectors, the invasiveness of regulation in the broader corporate sector across many countries has been more limited. Expect the focus elsewhere to rise.”
Quoting Gerard Minack of Sydney-based Minack Advisors: “I expect at least temporary restrictions on stock buybacks and perhaps also changes to the tax treatment of debt to discourage leverage. Corporate bailouts are likely to require equity haircuts, that is, the public sector taking an interest in return for assistance.”
That central banks and governments have stepped in – and in a major way – point to a future of governments playing a much bigger role in the coming years. “This is an opportunity for regulators to shape the kinds of society that we want to live in once we come out of this,” suggests Jenn-Hui Tan, global head of stewardship and sustainable investing at Fidelity International. “There is a rethink about what are the sorts of business models that we want to be supportive of? What are the sorts of priorities we want to have as a society? You can see regulators thinking about that now with the kind of dramatic policy actions taken through this crisis that has and will embolden them.”
Anand sees a new generation of companies that are able to partner effectively with governments and support quality with scale service provision the likes of which have not been seen before. “The next generation [of companies] will need to be delivering value in a totally different way.”