OP-ED: Getting Ahead of Structural Change After the Chaos

It would be disappointing to survive the crisis to discover fundamental value had turned to dust with a new normal. Following the shock of death and economic damage caused by COVID-19, we find it hard to imagine structural changes will not happen after the crisis. We anticipate regulators will wade in on perceived weaknesses or abuses, demand will shift with newly discovered efficiencies, and consolidation will be had behind failing companies. A few potential shifts to consider:

Benchmark’s buyback driver to weaken. A shortage of cash flow will likely lead to a sharp fall in buybacks—historically an important return driver. Last year, the yield from buybacks from S&P 500 was 3.2% on a market weighted basis. Companies that retain their strong cash flows will be in a position to buy back shares at considerably more attractive prices than last year.

Capitalization of business with strategic importance. US balance sheets are generally in decent shape. But bankruptcy risk of vital and naturally oligopolistic industries are prime targets for change. One example is airlines. Within days of the crisis gripping Europe and the US, the need for taxpayers’ support was clear. Raising capital requirements for airlines would bring stability along with less exciting returns through the strong end of the cycle. Looking wider, it is likely certain manufacturing industries will need to carry more inventory to avoid further unexpected disruptions. Carrying more working capital takes funds that could otherwise be invested in growth or paid out in dividends.

Control of the supply chain. In the US, around 80% of the active pharmaceutical ingredients used in drugs are imported, mainly from India and China. In March, India restricted the export of 26 ingredients and the drugs made from them. With globalization, companies and consumers have lost track of their supply chain. Most large corporations have insights into their first-tier suppliers. But suppliers to those suppliers (Tier 2 and beyond) remain little known. The risk of national hoarding during a crisis means a country could go short of vital products or components due to a reliance on imports. Tracking and securing supply chains could lead to on-shoring of ”strategically important” products—notably away from export facilities in Asia. The lack of supply chain tracking from field or mine to the shelf has become a glaring oversight.
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Real estate—catalyst for change. Brands strong enough to drive direct-to-consumer sales have the potential to further stretch their share of profit pools. A sustained absence of shoppers from marginal shopping malls and chain stores could prove the final straw. This would signal a further step in retail’s structural shift from physical to cyber. Companies such as Nike, Microsoft, Apple, Starbucks, and LVMH are well-placed for this step of the consumption evolution.

Speed of recovery is key for minimizing damage, but the shock is going to lead to change. Some of it will be fundamental and long-lasting. Keep your eyes on the horizon.

Sudhir Roc-Sennett is head of ESG and Thought Leadership at Vontobel Quality Growth, a boutique of Vontobel Asset Management.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.

Tags: Benchmark, cash flow, Coronavirus, economics, Economy, Real Estate, structural change, United States

The United Nations is proposing a $2.5 trillion economic package to support developing countries, which it said are facing unprecedented harm from the COVID-19 crisis.

According to a recent report from the United Nations Conference on Trade and Development (UNCTAD), the pandemic has caused developing countries to take an enormous hit in terms of capital outflows, growing bond spreads, currency depreciations, and lost export earnings, including from falling commodity prices and declining tourist revenues.

“The speed at which the economic shock to advanced economies has hit developing countries—in many cases in advance of the health pandemic—is dramatic,” the report said. “Even in comparison to the 2008 global financial crisis.”

UNCTAD said it is not optimistic that there will be the rapid rebound seen in many developing countries between 2009 and 2010, as “many of the conditions that produced a sharp bounce back in developing countries after 2010 are no longer present or a good deal weaker.”

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The report said that despite moves by world governments to launch massive economic packages, the UNCTAD estimates the world economy will still go into recession this year with a predicted loss of global income that will be in the trillions of dollars.

“This will spell serious trouble for developing countries, with the likely exception of China and the possible exception of India,” said UNCTAD, which estimates that developing countries face a $2 trillion to $3 trillion financing gap over the next two years.

To close this gap, the UN is proposing a four-pronged strategy to deliver the $2.5 trillion package. The first part is a $1 trillion liquidity injection that UNCTAD described as “a kind of helicopter money drop” through reallocating existing special drawing rights at the International Monetary Fund and adding a new allocation that will need to go significantly higher than the 2009 allocation made in response to the global financial crisis.

The second move would be an immediate debt standstill on sovereign debt payments, followed by significant debt relief. The UNCTAD said approximately $1 trillion should be canceled this year, overseen by an independently created body, comparing it to when half of German debt was canceled in 1953 in the aftermath of World War II.

The third prong has been described as a Marshall Plan for health recovery that would be funded from some of the missing official development assistance (ODA) that had not been delivered by development partners. UNCTAD estimates that an additional $500 billion, which is 25% of the unpaid ODA over the last decade, should be earmarked for emergency health services and related social relief programs.

And the fourth prong would be capital controls to slow the surge in capital outflows, reduce illiquidity driven by sell-offs in developing country markets, and stop declines in currency and asset prices.

“The economic fallout from the shock is ongoing and increasingly difficult to predict, but there are clear indications that things will get much worse for developing economies before they get better,” UNCTAD Secretary-General Mukhisa Kituyi said in a statement.

UN Proposes $2.5 Trillion Coronavirus Package for Developing Countries