Coronavirus Impact On Global Business / Economics

Is global recession coming in 2020 due to the impact of Coronavirus on Global Business / Economics?

Coronavirus is now global

• The world is almost certainly going into recession. The EU was on the verge of recession prior to the pandemic and US economic growth was slowing. The pandemic has accelerated a global economic slowdown.
• One key factor is the loss of jobs. Students should look new unemployment data in the major economies. Examples are: All car manufacturers in Europe have stopped production. The largest Tesla factory (Fremont) is in California, which has just gone into temporary lockdown. How long can or will companies continue to pay salaries to people that are not working?
• The major economies publish job data weekly or monthly. Make sure you consider the latest data and note any predictions.
• The Goldman Sachs analysts project a record high in the US jobless claims for the week of March 15-21, given the coronavirus outbreak led disruption in the domestic labour market. This will be the largest increase in initial jobless claims and the highest level on record. 

Impact on Industries

Aerospace manufacturing industry

President Trump said in a news conference that he supports a bailout for Boeing, which has been reeling from the combined economic fallout of the global pandemic and a prolonged safety crisis involving its flagship commercial jetliner.

Major airlines have cut flights by 85% as North America, Europe and some African countries have closed their borders for all but essential travel or restricted arrivals to people returning home (if they can get there).

Boeing suggests at least $60 billion to help aerospace manufacturing industry

Other industries

Several companies and industries are seeking relief. They include the U.S. travel and tourism industry, which is seeking $150 billion in aid, the U.S. airline industry which is seeking government aid of more than $50 billion, as well as Boeing’s $60 billion.

This is worldwide…in the UK many professional sports teams will experience financial shortfalls.

The insurance industry is unlikely to compensate for losses suffered as a result of the pandemic.

Companies that sell cars, white goods and industrial machinery will see cashflow shortages as sales fall sharply and people fall behind with payments.

Car Industry

Fears UK car industry may never recover as production lines close – Plants responsible for two-thirds of UK’s output and employing 17,000 workers have ceased operating.

Toyota’s UK factory closures are part of a wider suspension of production at all of Toyota’s European sites, which also include factories in France, Poland, the Czech Republic and Turkey.

The greatest economic damage will come from job losses, as those who have lost their job or are fearful of losing their job, cut back on spending.

US TESLA FACTORY SUSPENDS PRODUCTION for 3 WEEKS

The World will Recover…But When?

• The level of job losses will mean a severe reduction in the spending power of employees. The consequent fall in demand will in itself cause a fall in demand. This should be added to the medical concerns.
• Social distancing has already caused widespread job losses globally in the airline industry, hotel industry (including AirBnB), casino industry, rail industry, oil and gas (transportation), manufacturing industry and many more, where employees and customers have their movement restricted.
• Some countries in Asia, most notably China and Singapore, have been able to control the COVID-19 outbreak to some extent but there are still new cases and it is not definitive that there will NOT be a second wave of cases. Europe is now the epicentre of the disease, North America is seeing significant increases and Africa has weak healthcare systems to cope with an outbreak.

but when?

• Students will have to read about developments in the control of the outbreak. The general view is that a vaccine will not be ready until the end of the year at the earliest. The markets have yet to believe that chloroquine will avert the crisis.
• The central banks and governments have started to act through injections of liquidity (money) into the economy to make sure that the government has enough money to combat the virus and companies have enough money to ensure they survive. Interest rates have been cut by most of the major economies.
• The question remains how do governments get money to those who need it. Helicopter money, sick pay and unemployment benefits will cost government billions, if not trillions of dollars. Even this may take a while to get up and running.
• The world already had high levels of debt, these measures will increase debt significantly. How will this be paid back. Country Risk Analysis students should consider the ability of emerging market countries to raise debt or print money, without collapsing the value of their currencies.

HELICOPTER MONEY (Cash injections…)

• The Trump administration backed a plan to send checks directly to Americans as part of a $1 trillion stimulus package to help households and businesses, a dramatic step designed to cushion the impact of the sudden economic slowdown triggered by the coronavirus pandemic.
• Such a stimulus package would include an initial $250 billion for direct payments to individuals, according to administration officials and lawmakers, part of a wide-ranging fiscal and monetary effort. Money would also be directed at fighting the virus, protective equipment for medical staff and vaccine development.
• There is no sense of when this will end and no sense of how much it will cost to replace salaries with government handouts to keep the economy going.

Questions…

• Could the injection of more cash lead to further asset bubbles or worse lead to a debt crisis, where corporate borrowers or some governments are unable to pay their debts. Consider countries that rely on oil or commodities as a source of income. Saudi Arabia and the OPEC countries, Norway and the US.
• How long will the impact of job losses on economic growth last after the pandemic has been controlled. All Corporate Finance and Fundamental students should note their cash flow forecasts are based on future sales.
• Your forecast will be based on your view of the speed of the recovery. Is it L, U or V shaped?

Changes to Policy

• The recovery is likely to bring significant changes to politics and company operations.
• The US has announced programmes to inject over $1 trillion into the US economy. Expect significant political debate over whom the beneficiaries of these sums will be. The bailout of companies will be controversial, particularly for those companies that took advantage of cheap debt to buy-back shares or pay dividends. The tax-payer will be asked to bail out companies, where directors have been excessively paid and shareholders have benefitted.
• There are politicians ideologically opposed to BIG STATE. Capitalism should run its course, even though it results in bankruptcies. On the other hand, it is the employees who will pay the price of job losses and the economy as a whole that will suffer. Obama didn’t have things all his own way with the bailouts after the Financial crisis.

Additional welfare measures

• The pandemic has highlighted some deficiencies in a country’s provision of healthcare, welfare benefits and emergency contingency funds….
• The projected demand for hospital beds will be much greater than those available… the welfare provisions for the sick and those who lose their jobs are significantly below subsistence level…landlords have been asked to allow rent defaults etc…
• To address some of these issues will involve significant ideological debate… do you bail out the airline industry, hospitality industry,

Political debate

• Former Republican presidential candidate Mitt Romney, famously wrote in The New York Times in 2008:
• “If General Motors, Ford and Chrysler get the bailout that their chief executives asked for…, you can kiss the American automotive industry goodbye.”
• This time there will be a lot more industries wanting a bailout… more importantly over 99 percent of America’s 28.7 million firms are small businesses. The vast majority (88 percent) of employer firms have fewer than 20 employees, and nearly 40 percent of all enterprises have under $100k in revenue. How do you get money to these small businesses to save jobs? Should the government do so?

Changes to Companies

• Corporate finance students explored possible changes to manufacturing locations. The pandemic will cause companies to revisit the global supply chains they have built over several years… while these may have brought significant efficiencies and cost svings… the risks to production were significantly underestimated…
• Such changes could impact company cashflows over the nest few years….

Supply Chain Disruption

Has globalisation run its course… Apple will move some production outside of China and many other companies will look at how the pandemic has disrupted supply chains.

The supply shock from a lack of workforce has moved to a demand shock (lack of consumers). How long before the demand returns, which will encourage the suppliers to increase production. The duration of the pandemic is key…and a big part of your decision to invest.

Valuation

• What students should be looking at once they have done their research to estimate future cashflows is to compare the ACTUAL SHARE PRICE with their calculated share price.
• The STORY may be bad but the share price may have fallen too far…
• The company may receive a bailout – The US automotive industry may be seen as strategic or too important to lose. Those doing Ford must also consider the size of existing debt – Tesla maybe strategic in being a leading electric vehicle industry.
• The STORY may be good but the share price is too high…
• Online sales may do very well under lockdown in major areas such as California and New York. More people will be attracted to online purchases but your valuation may be lower than the ACTUAL SHARE PRICE.

Academic Questions / Assignments

Academic Questions / Assignments on this topic.

Assignment

• In these extraordinary times Corporate Finance students may see a recovery as soon as the second half of 2020 or much later. Students can extend their forecasts to 5 years (not 3 years) before using a normalised long term growth rate (perpetuity).
• Fundamental Analysis – The Tesla model has a longer forecast period.
• The situation is not bad for all companies, pharmaceutical companies, Uber Eats, Deliveroo, online grocery deliveries, protective clothing manufacturers, medical equipment suppliers and more… will people have money to spend?

Assignment

Choose a company, research it, comments on the company’s competencies, competitiveness, business strategies before Covid-19 era. Briefly explain the challenges (i.e. British Airways)/opportunities (Amazon.com) as a result of Covid-19.

Write a paper commenting on competitive strategies the business (your chosen company) has taken/should take as a result of pandemic.

Did the company strategy change in the last few months? If so, explain how, use the appropriate audits and frameworks to showcase the changes and implications?

What do you consider were the main competitive and market factors that had most impact on the business performance over the six months and explain why?

What did you learn about the task of defining and implementing strategy?