Perspective

After coronavirus: what will have changed, and how?


The impact of the virus and world governments’ responses to it is clear to all in the form of empty streets, shuttered shops and skies unusually free of air traffic.

The dramatic change to routines and lifestyles threatens disaster for many forms of business – but not all. While the global stock market sell-off has been steep, it hasn’t been entirely indiscriminate, with some sectors faring far worse than others. The markets’ response to the virus was also preceded, narrowly, by a response to the plunge in oil prices – which means energy stocks and related assets were already under pressure.

As the scale of disruption set in, investors first fled the sectors most exposed to a sudden loss of cash flow. Alex Tedder, Schroders’ Global Head of Equities, says: “The areas hardest hit are the areas you would expect. Anything related to travel, tourism, leisure, and to an extent legacy retail where there’s a big high street presence.”

Where there isn’t any footfall, there isn’t any cash flow, and these businesses – many of them already financially fragile due to other factors, looked in imminent danger of failure. Within days came reports of industries seeking bailouts, and at the time of writing there is active discussion between industries, trade bodies and governments about potential state assistance in a number of sectors.

This comes after governments have already promised significant programmes including, in the UK and elsewhere, direct wage subsidies to employees. The focus of any argument over further support for sectors or businesses is likely to turn first to the question of shareholder support, among other issues.

Clothing and household retailers in the UK, especially those already battling with consumers’ transition to online shopping, are likely to be among the worst casualties of the lockdown which began in earnest on 23 March. The length of any closure is uncertain. In China, footwear and clothing group Nike reported that the majority of its 7,000 stores had reopened by 24 March.

Not all retail businesses have experienced a shutdown in activity. UK grocers from mid-March were experiencing record demand for home delivery services, exceeding their usual Christmas peak periods. Prime Minister Boris Johnson, as he broadcast his stern message to “stay at home”, encouraged the population to turn to online delivery services rather than go out. Many established businesses were swamped by this surge in demand. Milk & More, for example, the current-day form of the daily milkman, was among many businesses that had to stop accepting new customers.

Around the world online retailers began a frenzy of hiring, with Amazon reportedly seeking 100,000 new staff and Walmart 150,000.

“The more people stay at home the more they tend to use internet services across the board,” says Alex Tedder, “from streaming services to e-commerce. This is coupled with the fact that staples tend to outperform in crises generally, as demand for products is less elastic. Ultimately we all need to eat and wash. The characteristics of defensiveness and sustainability will remain front and centre for most investors.”

The impact on the wider tech sector is less clear. In the rout up to the middle of March tech stocks fared comparatively well – as you might expect, says Alex Tedder. “Many of these business models – I wouldn’t say they’re immune – but their revenue streams can be recession proof”.

“We’ll see how advertising revenue holds up – that’s a question for Google and Facebook – but generally the tech sector business models are robust, and growth still there.”

Projections for infection levels in Europe

Predicted cases of COVID-19

p9_projectionsforinfectionlevelsineurope_w600px.png

Source: WHO, JPMorgan estimates, 17 March 2020

Andrew Howard, Schroders’ Head of Sustainable Research, suggests that one longer-term consequence of COVID-19 will be to focus minds on sustainable investing. He says the spread of the virus and the disruption it’s caused highlights how companies’ fortunes are “are intrinsically tied to their ability to navigate changes in the societies on which they rely”.

“Companies are more dependent than ever on the licences to operate society provides, supply chains are more complex and connected than ever, social and environmental tensions are more acute than in the past, and regulation is accelerating to address growing imbalances between corporate success and social needs."

The pressure on governments to spend will grow - as will their debts

But how much fiscal headroom do countries have?

p10_pressureongovernmentstospendwillbuild_w600px.png

Source: IMF Fiscal Monitor and Schroders, December 2019

Crucial to long-term outcomes will be the role of governments and their ability and willingness to spend to support aspects of the economy (see chart, above).

"Governments recognise the danger and they have to come back with a major form of stimulus," says Alex Tedder.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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