The coronavirus pandemic has unleashed an unprecedented humanitarian, societal, business and economic crisis. The complex intersection of biology, medicine, human behavior, politics, and monetary and fiscal actions means investors need to plan for an unusually wide range of scenarios (at PGIM, we estimate a base-case of around a 5% reduction in global GDP in 2020). By now, economic pundits have probably exhausted most letters of the English alphabet as they forecast V, U, L and W shaped recovery paths over the next 18 months.
In parallel to navigating this deep cyclical downturn, long-term investors also have to consider the massive structural changes that will reshape the global economy long after the pandemic has passed. Socially, the crisis will likely fuel growing tensions from wealth inequality as the pandemic disproportionately affected low-income and minority households. Politically, we will likely see an escalation in the ongoing tussle between globalization and sovereignty as the need for a multilateral response to a pathogen that respects no borders is countered by the need to close borders and protect our own.
In our new research report, After the Great Lockdown: New Business Realities and the Implications for Investors, my colleagues at PGIM focus on a different but equally important long-term implication of the pandemic: how will the coronavirus crisis structurally change corporate business models, strategies and actions? How will government intervention impact the business landscape over the next decade? As a result, which sectors and countries will emerge as the new winners and losers?
These structural adjustments by companies around the world will be major drivers of value creation and destruction across corporate debt and equity, both public and private. We identify several transformational trends that are likely to persist long after the crisis has receded:
A barbelling of global supply chains, both more expensive than the status quo. Some companies will pursue more geographically diversified, flexible, and purposefully redundant supply chains to better withstand future shocks – for example, by diversifying away from China into emerging Asia. At the other end of the spectrum, some firms will feel compelled to pull back from international supply chains, automating and re-shoring activities back to home markets instead.
From “just in time” to “just in case." In the consumer goods sector, tight margins, the easy availability of substitutes, and the increasing ability to use big data to accurately predict consumer demand likely means inventories will stay fairly lean despite some of the supply shortages many of us witnessed during the lockdown. However, beyond consumer goods, many companies will evaluate a transition from lean to fatter inventories – especially upstream in the capital goods sector, where substitutes are hard to find.
An acceleration towards “weightless” firms. Firms built on capital-light, tech-heavy models centered on investments in software, R&D, data and intellectual property were already establishing dominant positions across a range of industries. This trend will be turbocharged by the coronavirus crisis – in areas such as cloud computing, streaming entertainment, remote work tools, online groceries, and tele-medicine.
A new era of government regulation. If the September 11th attacks gave us the global war on terrorism, and the global financial crisis led to Dodd-Frank and Basel 3, what will be the regulatory legacy of the Great Lockdown? We believe government intervention could extend significantly beyond the stockpiling of essential medical and food supplies, exacerbating existing geopolitical fault-lines and trade tensions – and adding to the cost and regulatory burden of running global operations across manufacturing, agriculture and services.
Of course, with enhanced corporate resilience and robustness will come higher costs for doing business. It is still unclear how markets will value this trade-off, but it is one we will be watching very closely: it is certainly plausible that in the post-pandemic world both debt and equity investors may reward companies for significantly better downside protection even if it implies sacrificing some earnings upside.
To learn more, read After the Great Lockdown: New Business Realities and the Implications for Investors.
*Article written for LinkedIn by David Hunt, President and CEO, PGIM