Ripples of a new enemy: What does COVID-19 mean for you?

The purpose of this article is to provide you with insights on the global economic climate, how COVID-19 affects you, and what life could be like in a post coronavirus world. For the sake of simplicity, we will primarily be commenting on market conditions in the United States, though the information is relevant on a global scale.

An old story with a new twist

No matter where you live, what you do, or how much money you make, over the past few weeks if not months the SARS-CoV-2 virus also named "COVID-19" has undoubtedly changed the way you and everybody else thinks about the world. Throughout our history as humans, pandemics have been a common occurrence, whether we go back to the Bubonic plague in 1347, the Spanish flu in 1918 or even 10 years ago when Swine-Flu was at the center of attention. For those of you that are worried, relax, we will eventually come out of this stronger and better than before.

At least nine-tenths (93 percent) of the world’s population, or 7.2 billion people, live in countries with restrictions on people arriving from other countries who are neither citizens nor residents, such as tourists, business travelers, and new immigrants. Over the past 4 months, we have seen global economies brought to their knees through what started as a chain reaction from Wuhan in China (Origin of COVID-19), as shown in the graph below.

Due to the modern world now being a highly globalized network of logistics, travel, and e-commerce, COVID-19 not only made it across international borders with relative ease but at a speed unlike any medical professionals have ever seen, calling it one of the most "highly contagious" diseases known to modern science - with survival rates on surfaces from spanning anywhere between 5 hours to 3 days!

Rewind to the end of February, the entire world was in a state of shock that COVID-19 was more than media hype and that daily life could be severely affected. Small business owners have already been closed for days if not weeks and big corporations are working day and night to figure out the potential exposure of their clientele. At this point, most international travel and logistics networks were already coming to a screeching halt applying immense pressure on many other highly interdependent and leveraged sectors.

Take the global airline industry, for example, using the Z-score method developed by Edward Altman in the 1960s to predict bankruptcies, as analyzed by Bloomberg to the left, we see that operators will have to take early precautions due to deteriorating working capital and declining sales figures, though this varies carrier to carrier, research shows some debt to earnings before interest, taxes and amortization ratios (EBITDA) are close to 3x which means debt levels are 3 times EBITDA. However, much like every recession before it, this one will be no different; leaving certain industries ripe for better regulation and change, while putting others in an even stronger position than before. Examples of other industries that are also feeling the burn include ore mining, leisure & hospitality, travel arrangements and other transport to name a few.

So what do all these industries have in common? They are all fundamentally labor-intensive business models that are more subject to seasonal change, which puts them at the first line of evaporating consumer demand. Ultimately the most exposed sectors add up to approximately 25 million jobs directly affected in just the United States alone. Each with their own industry-specific risk and local barriers, for example, most restaurants in the U.S. are small family-run operations with low cash reserves in the first place, therefore for those businesses that do not have a rainy-day fund (usually 3 months of fixed cost payments), may have to look for government relief programs to help ease the financial stress in the coming months.

A common misconception is that most restaurants can switch to delivery-only operations to negate quarantine restrictions, while this may marginally help offset losses for some restaurants, for others it requires further re-investment at a time when they are already all-in, not to mention takes away from the return on investment (ROI) some have already made on premium priced locations (Eg: Food vendor on Times Square). Delivery applications such as Uber Eats and Doordash usually cover anywhere between 10 -15 percent in fees depending on the region. Therefore while change is possible for some, for the majority it is a waiting game to see what the coming months hold ahead. In the decision matrix presented above by Mckinsey such owners have to plan ahead with stakeholders in mind to identify the best way to hedge their risks moving forward, this applies to the consumer demand side as well as the vendor supply side. During this stage of the lockdown, planning is crucial to see how businesses aim on responding to what could be a very different consumer - business relationship moving forward.

Another example is in the retail shopping space, most would agree that in-person shopping was already dying at the hand of online retailers such as Amazon, Alibaba and ASOS way before COVID-19 showed up, however, the virus showing up now as opposed to later takes away value from any potential M&A opportunities that "older" brands such as Victoria Secret and Macy's may have had in mind. As falling share prices mean acquisition targets are far cheaper now than before - deteriorating large corporation shareholder value and inhibiting potential investment opportunities that may have given companies and their workforces an extended lifeline. Companies such as Macy's, Kohls and Gap are amongst the 250,000 stores that have temporarily closed since March amid the virus, with 15,000 of those stores to close permanently in the U.S. according to Coresight research. 

While the previously mentioned industries are some of the most vulnerable, that is not to say other sectors won't feel the ripple effects of what is now seemingly a global recession. (Remember that someone's spending is someone else's income so as income drops spending will drop creating a domino effect) In the coming paragraphs we will jump into economic effects and consequences carried out in response to COVID-19 and what they mean for us. And we will do so with the frame of the individual, the small business and the corporation.

Pain is the best medicine

The Individual

What many may not realize is that more money is being injected today into the global economy than in the entire history of modern finance. As seen in the analysis to the right, governments and central banks are doing their best to intervene through issuing government bonds, lowering interest rates to 0 percent as well as direct payments to workers and small business owners. The U.S. for example announced that they would be spending around $2.2 trillion with the hopes of providing more liquidity to people and businesses who are stuck for cash in the form of $1,200 checks for millions of Americans. The idea of this is both simple and complex at the same time, on one side we see that the legislation simply gives taxpayers $1,200 per adult and $500 per child. The benefit would be smaller for individual taxpayers earning over $75,000 annually (or $150,000 for a couple filing jointly) and disappear altogether for individuals earning over $90,000. The general idea here is that these cheques will promote consumers to spend on general goods and services thereby aiding businesses to keep the lights on till normalcy returns.

On the other hand, we have big corporations that employ people across various industries such as hotels, restaurants, airlines,.etc that are in the process of going bankrupt due to a historical combination of bad management and unsavory leverage practices. The amount apportioned to small business cases is around $500 billion while larger businesses see close to $260 billion. While these industries employ millions of people and those industries, in turn, create business for the remainder of the economy, many believe that such actions will continue to enable bad business practices that see senior executives rewarded during bailouts at the general expense of company employees. This falls in line with a common saying known in finance as "too big to fail", therefore once again leaving us to question the validity of trickle-down economics and how effective it is during times of uncertainty.

While the above is true for many countries around the world, so is the fact that the corona bill will eventually be footed by you the common taxpayer. Therefore the best you can do is understand the mechanics of how COVID-19 affects your future plans and try to mitigate those negative externalities in the process.

For those of you graduating university, or with only a few years of work experience, the current outlook can seem depressing as many large multinational businesses have simultaneously carried out hiring freezes due to travel and economic uncertainty and at this point some say are trying their best to hold on to the talent they already have. The best-case scenario for individuals in this category would be to sit tight and monitor ongoing developments in the hope that six months from now COVID-19 will be behind us and that vaccine developers already have the green light to mass produce for the summer of 2021. That being said, on a more positive note - you now have all the time in the world to develop those technology skills employers are so desperately searching for; Python, SQL and R-studio to name a few.

Given the number of expansionary policies being implemented around the world today, a COVID free environment would most likely lead to a consumer lead economic boom across most sectors with business owners gradually gaining confidence to make use of cheaper borrowing rates, excess money and subsidized business packages- leaving you in the same position if not better off than when COVID first showed up. The latter is true for all ages and should be seen by all as an opportunity for those who are risk seeking. That being said some would argue that consumption may lag due to the unprecedented panic that COVID-19 has brought with it. Sentiments of fear and pessimism could very well apply downward pressure in a recovering environment, inhibiting a quicker than a normal comeback.

So which sectors thrive during market instability? Equity investments in line with healthcare, technology, and consumer staples have in the past and will continue to show strength during negative growth periods. Good examples of technology-rich business models come from brands such as Amazon, Apple and Microsoft - those that reward shareholders based on their ability to invest in companies that create excellent products/services for consumers. This stays relatively true regardless of the economic positioning of the business cycle, boom or bust.

It is essential to remember that when rates are low, having your cash parked in your standard savings accounts are not the best options for risk-adjusted returns - remember that with every economic slowdown comes an opportunity. Research shows us that if equity picking isn't your game you can also go with broad market Inverse-ETFs (Exchange Traded Funds) that may aim to return +1 percent for every negative 1 percent return the underlying index returns. Some inverse ETFs may also employ gearing, or leverage, returning +2 percent or even +3 percent for every 1 percent loss in the underlying. In other news, gold prices traded as high as $1746.70 per ounce on after breaking through the $1,600 level in February, which is the highest its been for the past seven years. While it may be too late to make substantial gains (more than 20 percent) in precious metals, for those that see things getting worse before getting better, quick wins may still be available in the realm of 4 to 7 percent gains.

Another investment tool outside the purview of most non-finance professionals are REITs; companies that own, and in most cases operate, income-producing real estate. In the United States REITs have outperformed the S&P 500 by more than 7% annually in late-cycle periods since 1991 and have offered meaningful downside protection during recessions, underscoring the potential value of defensive, lease-based revenues and high dividend yields in an environment of heightened uncertainty.

Another common option is to invest in dividend stocks that can be a great way to generate passive income. When you're comparing dividend stocks, experts say it's a good idea to look for companies with low debt-to-equity ratios and healthy balance sheets (Eg. Costco). Alternatively for those of us who aren't inspired by financial instruments, a quick web search will shower you with opportunities in online tutoring, digital marketing, and online surveying to name a few - all of which may provide you with some form of passive income or at worst, give you an outlet to kill time.

It is fundamental to remember that from the last crisis if foreclosed homeowners had been able to hold on, they would have been able to see their home's equity – and therefore their wealth – increase. In fact, throughout the entire bull market recovery, previously foreclosed homes appreciated faster year-over-year than homes in general, peaking at 12 percent in 2013 and growing at a current annual rate of 10.3 percent as of Q4 2018. So the short message here is don't panic, your patience will most likely be rewarded as fortune favors the brave.

Small Business

This introduces an interesting segway into small businesses and how they are now faced with a series of difficult questions; can they survive another COVID-19-like pandemic? is their current business model sustainable? are the scorching rent prices worth it? These are all questions managers and owners alike need to discuss moving forward. 

Whether we like it or not, the world will not adjust overnight from months of COVID isolation to the good times like before, instead markets will adjust through a cautious process where consumption will uptick at a gradual rate. In the coming months if not years, small businesses will have a memory of such events, consequently, existing contracts between owners, suppliers, and landlords alike are likely to be re-negotiated - leaving some owners wondering if the pain of surviving is worth it at all.

Unfortunately for small and medium-sized enterprises (SMEs), outcomes don't look much brighter, most that could go wrong did go wrong, and so like everybody else most owners are helpless with limited information on when state by state restrictions will be lifted. At this point the best course of action would be to re-evaluate your current business/es to identify how you can organize or partner up with your local supply chains in a more effective manner, this is especially true about consumer goods and retail sectors. Another way forward is to make full use of government payment programs, for example, in the U.S. The CARES Act Paycheck Protection Program (PPP) is offering an unprecedented $349 billion dollars of loan support for small businesses which is primarily used for expense coverage and job retention - a much needed lifeline for many. However, upon closer inspection, as reported by CNBC; several of the companies that have received aid have market values well in excess of $100 million, including DMC Global ($405 million), Wave Life Sciences ($286 million) and Fiesta Restaurant Group ($189 million). Fiesta, which employs more than 10,000 people, received a PPP loan of $10 million, Morgan Stanley’s data showed.⁠ What most people and small shop operations don't realize is that while they may be thrown a life jacket the actual lifeboats are coming for the rich.

Following a report by the Joint Committee on Taxation (JCT), a nonpartisan congressional body, 80 percent of the benefits of a tax change tucked into the coronavirus relief package will go to those who earn more than $1 million annually. While this is great news for high net worth individuals, some of whom are business owners themselves, it may come at the cost of increasing the income gap even further, which history shows only goes on to prolong and exacerbate social-economic tensions. To be fair though, COVID-19 has hit the rich just as hard, with the numbers of American millionaires falling by 500,000 in record time.

In the past few months alone more than +22 million people have filed for unemployment in the United States destroying all jobs created since the global financial crisis of 2008. Real unemployment has also hit around 14.7 percent, the highest level since 1940. Research shows that whatever the industry size, low skilled employees are usually the first to go, even though in some industries they account for the smallest fraction of total firm operating costs. From the perspective of small business owners however, these cuts are a necessary part of their survival strategy as a lack of customers reduces the need for excess staff such as waitresses, dishwashers, etc. Jobs in related sectors will suffer similar exposures, however, it is important to note that on the boom side of the business cycle - these individuals will be the first to be hired and enjoy the benefits of a fully geared economic machine.

Other preparations SMEs can asses are business continuity plans for significant absenteeism, supply chain disruptions, or changes in the way you need to conduct business. While not ideal it is critical to identify only the essential employees and business functions, and other critical inputs such as raw materials, suppliers, subcontractor services/products, and logistics required to carry on business operations. Finally, share your response plans with employees and communicate expectations. At times like these, transparency is everything and your employees will thank you for it.

The Corporation

Home office anybody? Chances are that your work life has been a little different as of late. For those of us that watch the news it is impossible to ignore the daily fluctuations of the stock market as well as the hoard of analysts, business owners and investment managers all trying to pick their foreseeable outcome for the six-month road-map ahead. For moments such as this it is important to understand what corporations and big businesses are going through - to profit from the chaos you must first understand it.

As opposed to just a quarter ago, senior management across the board is now faced with a series of important questions which will guide stakeholder expectations for the remainder of 2020. These questions are both from an internal firm (IF) perspective and a client perspective (CP). From the IF side of things, companies are currently trying to shift to a work-from-home model with the heavy utilization of video conferencing tools such as Zoom and Microsoft Teams - a far more doable task today than just a couple of years ago. The idea would be to try and stick to the same operational processes as before, even though project pipelines may move at a slower rate, whilst keeping all employees highly utilized.

From the client perspective, many corporations may have to modify current and potential engagements with both sides unclear about the immediate timeline ahead. The hope of many of these corporations is that consumer demand will come roaring back - on the news that COVID-19 is no longer a persistent global issue and that life will start to normalize. The flip side of the coin is that if COVID-19 is here to stay - what do companies do with their excess labor pools? global expansion plans? excess office spaces? - only a vaccine timeline and patience will tell.

As most research statistics will show, the market is currently showing an abundance of interest for digital roles - industries such as technology, healthcare, pharmaceuticals and medical devices showing the most demand. So what does this mean for the rest of us? The short answer is that large companies still want technology talent and will ride out 2020 without making any quick decisions and will most likely assess the impacts of COVID on their supply chains on a monthly basis, which just means business will continue as usual with some added delays. Companies such as Google, Facebook, and Morgan Stanley have already made it clear that the retention of their current workforce is a main objective for this fiscal year. These announcements alone have built-in information that one may dissect - businesses sense that the economy could be poised to make a quick comeback post COVID, as unlike any recession before it, this one was brought about by non-financial factors and had no fundamental relationship to the health of capital markets around the world.

At this point it is essential that corporations develop incident management and scenario plans that are specific to COVID-19, while focusing on how to meet government priorities in individual countries and minimize the risk of business disruptions. Furthermore attend to immediate global mobility concerns, such as reviewing travel rules, HR policies, first-aid plans. For companies that do not have a technology-enabled working ecosystem, they may have to focus on the firm's existing I.T base and communications infrastructure to support remote working during the crisis. The latter is now more important than ever as firms must accelerate digital transformations, as the shift to remote working reveals gaps in IT infrastructure, workforce planning and digital upskilling as explained in a recent analysis by PwC.

On the investment side of these recommendations, we must ask ourselves - what is our current appetite for risk? and what to we stand to gain/loss from acting now?

“It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.”- Warren Buffet

Everyone understands the notion of "buy low, sell high", however in the world of finance this is rarely the case, with most startups and businesses being purchased at absurdly high valuations. Such firms are very rarely priced on real business value. Deals research shows that median EV/EBITDA transaction multiples range from 10x to 15x. The point here is that most businesses go through acquisitions at the top of the business cycle when financial conditions are good, however, real firm value doesn't change at any stage. Therefore during periods of negative growth, for companies with cash availability, great businesses with huge upside may be purchased at a fraction of the cost. Firms that are risk seeking enough to consider acquisitions at the bottom of the cycle (where we are fast approaching) will stand to benefit the most in the form of cheaper intellectual property buys, talented workers and growing brands that will likely boost business performance due to operational synergies in the future. However, the latter while being the ideal outcome does not always translate into higher returns on invested capital (ROIC) for shareholders. Consequently, senior management will have to understand how real profits can be extracted from potential deals to and target opportunities with the highest net present value (NPV) in what is currently an increasingly murky business environment.

For those companies lagging behind in the technology department, COVID-19 is a rude awakening that global markets and local economies are more brittle than expected and that contingency planning is still as important today as it was 100 years ago. Leaders must change the business dynamics of current operations to a more mobile workspace, which may aid in reducing historically high costs such as utilities and rent. Modern ERP solutions that come in the form of cloud technology may ease some of these pains as many operators such as Salesforce, SAP and Oracle are now shifting from long-term corporate technology agreements to a more subscription-based landscape, which means greater availability of technology services fitted to your specific business needs at a fraction of the cost, relatively speaking. These technologies can give you broad insights anywhere between financial P&L calculations to marketing engagement clicks to HR management policies. These insights coupled with machine learning and broader artificial intelligence applications will give business leaders the best decision-making tools as well as operational information to succeed moving forward.

Other areas of improvement and opportunity should come at the expense of firm competition - tough times often show us the true character of rival firms, therefore investing in areas where your competition shows signs of weakness is another competitive play if effectively used. For example, a Harvard University study found that firms that cut costs faster and deeper than rivals don't necessarily flourish during recessions. They have the lowest probability of around 21 percent of pulling ahead of the competition when times get better - meaning if your competition is firing you should be hiring! Such decisions not only improve consumer and employee brand loyalty but also give corporations the best talent pools available at relatively lower costs - something that is hard to find during economic booms. As seen below in an analysis conducted by Bain Consulting, companies that don't adapt to change and remain openly receptive to its consumer base won't see it through to the other side.

Strategies such as core talent searches, emerging market investment, and branding campaigns come easier for companies with flexible cash reserves during difficult times - fixed on the goal of becoming market leaders. Popular technology companies such as Amazon, Google, Facebook and Apple have carried out such aggressive strategies in the past and have the most to gain due to their large stockpiles of cash. The tech giants have already announced a strategic expansion and hiring plans for this recessionary period, both in the U.S and the rest of the world. Good news is as the market comes to terms with COVID-19 and how long its effects could potentially last, investors will eventually get back on their horses and ride out the coming months, with positive indicators already showing in an analysis published by the Wall street journal below.

Defensive strategies, on the other hand, take a cautionary approach and work on the principles of cost reduction, risk mitigation, and core business competency concentration. All of which are still as effective today as they were 50 years ago in achieving quick wins given bad economic situations. It is interesting to note that companies in sectors such as metals mining, manufacturing, and construction are often less subject to media coverage by journalists and blogs, therefore suffer less negative feedback in comparison to banking or technology companies, if jobs and factories are shut down. Research shows that in the past, job losses in manufacturing, mining and farming were recurring headlines during times of economic hardship - however, due to their underlying B2B model they are generally less exposed to negative sentiments from the public. As such these types of business undergo less scrutiny for their actions during high-stress events allowing them to navigate choppy waters with less outside interference. An example of this is a publicly exchanged company that sheds its workforce to support profitability, however, the negativity surrounding the company afterwards may set fire to an event-driven sell off, which sees the share price drop. This drop may inhibit further selloffs due to respective price controls set by traders, ultimately sending the shares spiraling downwards - eroding shareholder value.

Tough times don't last, tough people do.

With everything going around the world today, what was once a simple process yesterday can be an intricate complex problem tomorrow. As individuals, small businesses and corporations we must not act in solidarity but rather adopt more inclusive decision-making practices and look deeper into the relationships we have created for each other.

While the current outcome can seem volatile and dangerous, for those investors that have the economic resources to do so - making risk-adjusted investments come highly recommended as markets are more likely to bounce back within a shorter time frame than recessions before it - assuming the issues of COVID are curbed. Such investors and businesses are likely to make huge leaps within their respective sectors and may even do so faster, than they could have if they made similar moves during an expansionary period.

Disclaimer: PricewaterhouseCoopers (PwC) does not endorse, promote, or warrant the accuracy or quality of this article. All thoughts expressed above are mine alone.