Game on (Half Time Score: 0-0)
The Economic Impact Assessment of COVID 19
The unprecedented and untamed nature of the pandemic has sprung war-like consequences in business. While some have been forced to completely close, others have welcomed a tsunami of new customers that had not even heard of their product just weeks before the crisis hit.
Let us look at some winners and losers in context:
Technology (1-0)
One big winner was/is Microsoft’s cloud technology allowing people to be online at any one time, resulting in a huge spike in usage for education and businesses. Microsoft Teams reported over 84 million daily active users (DAUs) by the end of May – up 90% from the reported 44 million in March 2020.
The same applies to Tencent in China as it provides both cloud and ‘work from home’ applications for the Chinese audience.
Zoom has seen both business and personal customers surge, going from 10 million daily meeting participants in December 2019 to 340 million in July 2020. This extraordinary growth means the company is now bigger in terms of market capitalisation than the world’s top seven airlines.
Gaming and online winners include EA and Activision Blizzard in the West, and Tencent and NetEase in China. And of course, Netflix has nearly doubled its subscription from 8.47 million subscribers to 15.77 million.
This level of consumer demand and awareness would have been impossible to achieve in normal times, and therefore tech sector is on a completely different growth trajectory than it otherwise would have been.
Other positive offshoots include the realization that working from home is viable for many jobs, saving large costs on commercial rents and logistics. We are likely to see an acceleration in the adoption of artificial intelligence, analytics, customer behaviour services, video conferencing and distributed workflow.
Healthcare (0-0)
Pharma companies are looking to develop a vaccine process that is complex, heavily regulated and difficult to scale. It’s unlikely that we will have a vaccine for another 6 months, and this has ramification on all walks of social and economic life. In the meantime, ‘remdesivir’ has been in the headlines as a stop-gap to help suppress the virus until a vaccine is on market.
On the flip side, since hospitals have been forced to prioritise Covid-19 patients, certain elective procedures, such as orthopaedics, suffer delays. Companies like Stryker, Medtronic and Johnson & Johnson are now adversely exposed.
Travel Sector (O-1)
Sadly, one of the big losers of the pandemic is the travel sector. With lockdowns imposed across the world, travel has come to a complete standstill.
In the short term, it is all about balance sheet. Some companies are very well protected from this kind of shock. We estimate that Priceline and Booking.com could survive 2 years with no revenue. But some in the aviation sector are not so lucky. Depending on the length of the pandemic and sovereign support, we may see airline bankruptcies and deep job losses.
Evidently, the cessation of travel also affects hotels. Occupancy is running at just 10% in some markets. Apart from the home truths of Mauritius, the worst-affected markets continue to be Spain, Italy and Japan. Also, large hotels chains do not own their hotels – they merely franchise their brands. It will be easier for those hotel owners to get access to funding in a downturn, while independent hotel owners might find it trickier. This lead to franchise hotel groups taking market share, a dynamic played out in previous recessions.
A market segment perhaps permanently impaired is business travel, with many meetings done at great travel expense are shown to be just as effective over video conferencing. This will heavily affect airlines and franchise hotel groups that are exposed to business travel. Marriott, for example, is 65% exposed to the business traveler.
The Mauritius Context:
Mauritian companies are on average running at 50% of their normal capacity with the COVID-19 crisis, with the following top 3 challenges:
- lack of operational cash flow,
- slump in demand, and
- reduced opportunities to penetrate new markets
Whilst lack of operational cash flow is the main impediment for exporters, it is drop in demand for goods/services in the case of the local enterprises, where a lockdown was rapidly enforced by the government to limit the spread of the disease.
Looking from the prism of “nature of business”, services companies see “lack of operational cash flow” as their primary challenge, whereas manufacturing companies view “logistics and offering alternative products” as their key challenge.
Fiscal Risk and Redemptive Measures in Mauritius:
The lack of operational cash flow being seen as a major challenge pan-Mauritius, a majority of the companies have approached financial institutions, to obtain “working capital”, or “asset financing” and “factoring debt recovery delays”.
Commercial banks seem to have been the most responsive to firms requests for financial support, noting a less positive response from public sector banks, while crowdfunding essentially offered support on high interest rates. The GoM backed Mauritius Investment Corporation, with its 60 Bio outlay, is gaining some traction for entities with considerable gearing on their asset-base.
Working remotely as well new strategies/products are helping Mauritian companies cope with the challenges of the COVID-19 crisis. Ultimately, employees risk losing their jobs as business activity contracts and capacity utilisation is reduced. The current job loss forecasts are around 10%, while admittedly significant – are not greater, partly due to the possibility for many to continue working remotely, as well as the wage assistance scheme.
Conclusion
Given the incertitude around economic and health crises, our focus is on advising clients on investing in resilient companies that stand the greatest chance of surviving the ravages of this pandemic. Investors and entrepreneurs ought to stay course on the long term. In the short term, most companies will be focusing on survival, not growth, and investors will back those that are likely to prevail as winners within their sector.
As opposed to other African businesses, Mauritian firms have reacted relatively positively to the measures taken by the Government. Local businesses have turned to the state for a multi-pronged financial support. These packages might possibly, be the reason why lay-offs may remain relatively limited.
The silver lining in this crisis is that Mauritian businesses seem to be prepared for extreme situations, in so far that the businesses have a contingency plan.
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