Making of a welfare state, disruption policy by companies and cash getting better discounting
The
pandemic has not altered the world. It had already begun to change a dozen
years ago. What the outbreak of coronavirus has done is to make the transformation
irreversible. From turning unmistakably risk-driven, when China opened up its
economy in the early 1970s and early 1980s, more and more countries are
becoming welfare societies, acknowledging the limits of market forces. The 2008
global securities meltdown was triggered by reckless lending. Instead of
turning tight-fisted, the US central bank’s remedy was giving away money at
practically no cost to keep companies running. In 2020, the Federal Reserve’s
bond-buying has been supplemented by the US administration’s direct transfers
to substitute pay cheques. Pump-priming is now set to become a precedent of
what to do when faced with an economic disaster that could be man-made, as in
2008, or a medical emergency as in the present day. Differences in US Congress
or the EU are not about the need but on the quantum of support. The concern of
monetary authorities is not their balance sheets but keeping the credit
pipeline open. The initial scepticism of asset bubbles has given way to
grudging recognition of the effectiveness, when nearly all the employable
people in the US got jobs. Not surprisingly, stakeholders expect the second act
to replicate the first, despite an uncertain timeline for the availability of
vaccine. A bull-run is set to be the new normal irrespective of the reality of
the economy. The new-age of socialism is with capitalist characteristics.
As
developed nations watch helplessly the surge of patients overwhelm their
healthcare system, businesses, too, have to reckon the reality that covid-19 is
here to stay. Strategies that produced results in the past will not necessarily
have the same outcomes going ahead. Huge capacities to achieve economies of
scale for competitive pricing are likely to be a disadvantage if the site is in
an area that has borne the fury of the calamity. Backward and forward
integration, a favored recipe for cost-effective production, will be
meaningless if distribution of finished goods poses a logistical problem.
Proximity to raw materials or markets to circumvent poor connectivity can be a
winning strategy only if the back- and front-ends of the value chain function
simultaneously. To overcome, a smaller but self-sufficient presence across
regions might emerge as a preferred option. Outsourcing will accelerate as
niche suppliers will have the agility to keep ticking. Work from home,
contactless shopping and home delivery will be an opportunity to become
asset-light. An important challenge will be ensuring working capital at a time
revenues have decreased or disappeared. The decline in the cost of borrowing
accompanying the economic turmoil will be used to pad up treasury. Rationalising
overheads will be the method to maintain or even expand the margins instead of
pricing power. Of course, soft input expense on drop in commodity prices will
be a major contributor. Cash and equivalent will assume a prominent position.
Debt issuance and equity dilution will be frequent to suck in the liquidity
sloshing around, without being a source of worry for the impact on profitability.
Growth expectation will also have moderated as real interest rates become
practically non-existent.
Besides
governments and companies requiring a new vision to prepare for unexpected
shocks, investors will have to re-examine their strategies. They will have to
scrutinize revenue streams to determine segments vulnerable to discretionary
consumption. The distaste for lots of reserves, signalling lack of
opportunities, for dragging down the return ratios will have to be muted. How
fixed expenses are managed when sales dry up will be a topic of interest. The
pressure for ramping up dividend pay-outs has to be tempered as a trade-off for
remaining a going-concern. Priority to survival over capital spends will be
lauded. Valuations will be pegged to access to cheap funds than earnings growth.
The government could even impose capital adequacy on the lines of banks.
Despite protests, investors have come to accept the 2% spend of the three
preceding years’ profit on corporate social responsibility. The buffer might
even act as collateral for short-term loans. It will not be surprising if the DRHP
of IPOs spell out how much of the proceeds will be kept aside as security. The
market might even be willing to assign higher discounting to such prudent
issuers. Importantly, enterprises will be expected to spell out in the annual
general report policies and systems in place to cope up with future
disruptions.
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