The COVID-19 pandemic is having a significant impact in many areas around the world. The virus directly caused the market capitalization (value) of companies globally to drop by US$23 trillion*, starting in mid-February.
States are rapidly working on measures to support companies so that most can overcome the crisis. Great Britain has announced that a package of 330 billion British pounds has been prepared for loan guarantees and other support for companies. The US Fed has announced that it will provide a liquidity fund for companies to meet maturing obligations based on issued corporate notes and bonds. US President Donald Trump is in favor of approving as much as one thousand billion dollars in stimulus. Russia is preparing a fund of 4 billion US dollars to help (primarily) companies to rehabilitate the negative effects of the drop in oil prices.
Liquidity and business model are two characteristics that will largely determine which activities are at the highest risk.
When it comes to liquidity, oil companies are particularly affected by the drastic drop in the price of crude oil to the level of 25 US dollars per barrel, which is the lowest level in the previous two decades. According to the calculation of the investment bank Morgan Stanley, the break-even point is 51 greenbacks per barrel.
In addition to liquidity problems, the vulnerability of businesses is also a consequence of their business model. If Apple doesn't sell any phones during the pandemic, it can sell the same phones later. On the other hand, the income of restaurants or cinemas during the pandemic is lost forever.
In contrast, some industries experience significant prosperity during the crisis. Supermarkets are having trouble meeting all the demand caused by panic buying. Manufacturers of toilet paper, as well as hygiene and disinfection products, also recorded a drastic increase in turnover. However, the observed growth is not sustainable in the long term, as panic buying will have to decline in the future as the crisis approaches stabilization.
Other activities can expect positive effects in the long term. Forced to work, shop, and entertain at home, people are very likely to permanently acquire new or reinforce their existing consumption habits focused on online content. Platforms for corporate communication such as Zoom, Microsoft Teams, Slack, WeChat Work, and the like, recorded a huge increase in the number of new users, from 1.4 million new users per week in the first half of January to 6.7 million in early March. Research by Barcaycard in the UK shows subscriptions to online entertainment platforms such as Netflix grew by 12% (year-on-year) during the month of February, while spending on food delivery increased by 9%. Amazon is hiring 100,000 new distribution workers in the US to meet increased demand. Traditional retail chains that have invested in online platforms are also seeing growth.
In the end, the pandemic will almost certainly result in further market consolidation. Consolidation is expected to be carried out first in the airline industry, both in the USA and in Europe and Asia.
Additionally, it is likely that firms least affected by the crisis, as well as companies with significant investment funds, will see significant growth through acquisitions of companies whose value has fallen drastically as a result of the crisis. So far, unverified information says that Apple is interested in spending more than 200 billion dollars to take over the Disney company, whose shares have lost almost half of their value since January. Warren Buffett, who has been saying for years that shares are overvalued, may find adequate targets for acquisitions in the current market downturn (Berkshire Hathaway has $128 billion of free funds available for investment).
The crisis will definitely affect some business models to be completely abandoned, others will change radically, while at the same time, completely new business models will be created.
Mihailo Aleksic, CFA
Partner, Financial advisory services
*Note: 1 trillion = 1,000 billion
