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Monday 9 March 2020

What is changing in the business world with the coronavirus?


Just wanted to note down some thoughts on the possible impacts of the current Coronavirus pandemic and the resultant global market crash. I am not an economist, neither a political analyst but merely an observer of human and system behaviour.


Supply chain optimisation likely to incorporate redundancy and failover
The current global supply chain is optimised based on cost and time. That is manufacturers tend to get their components or parts built in places where it is cheapest t produce and ships it to the factories just-in-time. With a large-scale pandemic like situation, which comes right on the heels of US-China trade war, large (and small) corporates will rethink their supply chain and dependency on China. They will now need to build in inventory costs as the supply chain would need to factor in redundancy and supply disruption constraints. This will, in turn, increase the cost structures and reduce margins. Some industries, like electronics, which ran of wafer-thin margins, may find it very difficult to survive or will need to take price hikes.

Move from globalisation to localisation may get accelerated

The last few decades had seen an unprecedented wave of globalisation with free movement of people and products. This is increasingly facing headwinds as resistance builds up in local communities leading to economic and social strife. The rise of the right-wing globally and Brexit are manifestations of these social shifts. As more business shifts inwards, global companies will need to have a better local presence in countries they wish to do business in. Second-order impacts may include a decline of tax havens and higher taxes for global companies as they would need to pay taxes for profits in each individual country they operate out of.

New work culture building up

Working from home was prevalent in only a few industries like IT. With a lot more people getting used to working from home, it is likely that more companies will realise that they can actually run their businesses when employees do not come to one centralised office. This is a very profitable move for companies as they would be able to reduce expensive office space, maintenance, electricity and other such costs. Second-order consequences are too many to list here but a few prominent ones are negative sales impact on auto, petroleum, real estate prices. Shorter-term it would also have a negative impact on all crowded places like restaurants, shopping malls, movie theatres.

Ecommerce likely to get a boost

Online sales have already started getting bigger and is likely to expand much further once more and more people hesitate to go out in public places like crowded shops and malls.

Government & Central Banks have limited options

Respective governments and central banks essentially have two policy actions that they can use – fiscal and monetary. That is, they can tinker with taxes, government expenditure and interest rates. The issue is you cannot fix a supply-side issue with a demand-side solution. That is, if you are running say an automobile factory and don’t have the necessary supply of engines from China, then reducing interest rates will not solve your problem. This is the same reason why when food inflation shoots up, you can’t really do much by cutting rates, simply because the food is just not there. Similarly, neither does cutting taxes, both corporate and individual, help in any way. What these measures do is to price the risk in the market. With reduced interest rates, central banks (and governments) push the people to invest in riskier assets or fuel consumption or both. The last option that the government has is spending out of this problem. Government expenditure has the potential to create employment, provide a sense of security to corporates and basically spur the economic engine to start working once again, with the hope that it leads to a positive spiral of higher consumption and sustained growth coming back.

The Indian government gets a Godsend as crude prices collapse

India, as a major crude importer has just received a Godsend with crude oil prices collapsing due to the fight between Russia and OPEC (Saudi). The government finances are in a mess with no money to spend at all. With this fall in crude, the government can potentially use the money saved and channelize into infrastructure development. There are large areas where India can and should invest in for future global competitive advantage. Now is the time to get into those areas like green energy, increasing healthcare facilities, schools, colleges, railways, airports, inland waterways, ports, defence. The list can go on.

China is in a precarious situation

China is a very insulated country. But rumours are that the banking system in China is under stress and the coronavirus has only exacerbated the situation. Unless it can demonstrate that it has been able to successfully contain the outbreak and are getting back to normalcy, they will be the biggest sufferers as the global manufacturing supply chain will readjust and leave them behind. This will have a large long term impact on the social and political situation in China. But with an authoritarian government in place, it is likely that China will be able to show the resolve required to quickly get back to normal.

First global crisis in the age of social media and fake news

This is perhaps the first major global crisis in the age of social media. Social media amplifies and distorts messages, so the impact of people is very different from when all media was state-controlled or influenced.

Flight of capital to safety

There is a flight of capital towards safety and security. Unfortunately, in India, last 2 years has seen multiple critical situations in the banking and financial sector, one of which is currently underway. This has severely eroded the faith that investors have in banks. With a possibility of further rate cuts from RBI, bank deposits will become more unattractive. IN such a scenario, gold and US dollar tends to do well.

Investment horizon reduces during crashes

Market crashes have a way of reducing our time horizon from decades or years to weeks and days. If an investor just sticks to thinking about the underlying businesses and how they can get impacted by the change in the context, and maintain the long-term horizon, it will perhaps help in reducing the stress and anxiety.

Better to stick to your investment plan

All crises finally come to an end. This too shall pass. And when there is a global crisis, governments tend to take coordinated action. I would be very surprised if we do not see significant quantitative easing (reduced interest rates) and other policy measures announced by governments across the world.

So, fasten your seat belts and enjoy the ride. After a few years, you will probably tell the next generation of market participants, “Heck! I lived through that!”

5 comments:

  1. That's really deep thinking, Abhishek. Thanks for putting your thoughts together and sharing them with us.

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  2. That's really deep thinking, Abhishek. Thanks for putting your thoughts together and sharing them with us.

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  3. Very interesting read. Thank you sir

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  4. very interesting read. Thank you sir

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  5. Very apt analysis and projection.

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