After going through a decade and managing to avoid a global recession, 2020 has been a rude awakening as the world plunges into recession and is experiencing the sharpest spike in unemployment since the Great Depression. With a lead time of at least two years to commercialise a vaccine, the globe is now trying to adjust to a new normal.
Out of the Covid-19 rubble questions arise about how to rebuild our fractured economy. A sickly patient before Covid-19, the economy went into surgery already weak. Credit ratings agencies downgraded our sovereign debt to junk, the government responded by taking drastic steps to try to revive the economy, injecting stimulus amounting to 10% of GDP, and the Reserve Bank threw caution to the wind by slashing rates 2.5 percentage point to 60-year lows. Yet we are left with many questions of how we will emerge from the lockdown, stuck between the Scylla and Charybdis of preserving lives at the cost of jobs.
When food giant Pick n Pay skipped its final dividend and accessed banking facilities to build a liquidity buffer, one could not help but wonder how small businesses that have been unable to trade and are without the balance sheet strength of the corporate giants or access to funding have any chance of surviving this crisis.
With GDP growth estimated to contract 10%-17% (though the data releases are expected to be delayed) and 10-million people potentially joining the ranks of the unemployed, it is important to recognise the gravity of the situation. But despite this very dismal outlook we can still take further actions to prevent a worst-case scenario.
While we should protect elders and the vulnerable, we should plan for a phased return to work as soon as possible. As businesses run out of resources we cannot afford for them to close down and shed even more jobs. In this crisis banks can be part of the solution rather than the cause of the problem, as was the case in the global financial crisis. There is an urgent need to advance emergency funding for small businesses, and banks are well equipped to do so.
Our country is likely to experience more local travel than intercontinental inbound tourism for a while, sealing the fate of our national carrier
The life blood remains capital and this will be required in the form of debt funding to sustain those under funding stress and to revive those facing a liquidity crunch. We estimate that the need will span across the capital structure from investment-grade debt, quasi-equity to distressed funding for companies that succumb to Covid-induced business interruption.
While the JSE has been an efficient vehicle in raising capital for listed entities in the past decade, this capital has principally been channelled into offshore forays with, often, a disastrous outcome. We estimate that domestic companies have increased their offshore source of revenue by 30% in the past decade, with the unfortunate result of net liabilities of more than 30% of GDP being accumulated offshore.
Businesses will also have to quickly adapt to changes in consumer behaviour. It’s not surprising that the Sage of Omaha dumped his holdings in the largest US airlines last quarter as he bet that air travel would become more restricted. In fact, the market cap of Zoom, a video service, now exceeds that of seven of the largest global airlines. Likewise, our country is likely to experience more local travel than intercontinental inbound tourism for a while, sealing the fate of our national carrier.
Consumers will also choose to remain at home than go out for entertainment, accelerating the demand for online services. Companies will need to move to an omnichannel model to adapt fast to this change in behaviour. Fallen giants such as Edcon took far too long to change their business models, and others such as Dion Wired paid the price as online shopping for big-ticket items became the norm through the likes of Takealot. Even in the US, clothing chains J Crew and Neiman Marcus hit the wall, with car rental giant Hertz on the brink.
Naspers, through its stake in Tencent, is poised to benefit from this convenience trend as demand for online entertainment, e-commerce and home delivery grows.
Desk at home
The world’s six largest companies now are the 4A FM: Amazon, Alphabet, Alibaba, Apple and Facebook and Microsoft.
New ways of working will also mean that many employees will shuttle between a hot desk in the office and a desk at home, seamlessly tuning into meetings online. In the FirstRand Group alone we now have more than 11,000 meetings online and more than 28,000 calls a day, highlighting that technology has become an essential tool in our lives already. And technology accounts for a quarter of our Global Leaders Equity Fund.
Globally, central banks have expanded balance sheets by about $4-trillion, zooming past the financial crisis highs. Debt accumulated by the non-financial sector globally has moved beyond the 220% of GDP highs attained during the crisis, according to the Bank for International Settlements.
The concern is that we are mortgaging our future and that future generations will have to tighten their belts to pay for this debt. At home, the generic 10-year bond yield spiked to 13% in anticipation of an estimated R100bn of foreign outflows as we exited the major global bond index. The good news is that buyers returned in search of yield and after some huge auctions our yields are back trading below the 9.4% level.
At Ashburton we are also prioritising channelling emergency capital to distressed businesses as we believe now more than ever companies will be judged on how they affect the economy and save jobs, not the financial returns generated. I am proud to be part of a group in which shared prosperity is our call to action.
• Rassou is chief investment officer of Ashburton Investments, part of the FirstRand Group.
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