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Coronavirus: the long-term impacts on emerging markets

Beyond the shockwaves, immense uncertainty and eventual recovery, each economic crisis changes the way society and corporations operate, leaving scars but also spurring innovation.

The 2000-2002 dotcom bust disproved assumptions that any enterprise could thrive by going online, but gave rise to today’s internet giants and the telecommunications capabilities that have sustained many businesses in recent weeks. The ultra-loose monetary policies that prevented the financial system from collapsing in the 2008 crisis remain with us, but new regulations have helped create a more resilient banking sector.

What could be the enduring impacts of the coronavirus pandemic on businesses? From healthcare to retail to technology, we assess long-term drivers of change.

The rapid spread of the virus and struggles of Italy’s healthcare system – and the ominous challenges facing those of the US, UK and India – have made it clear to many governments that hospitals can’t cope with the speed and scope of the current pandemic.

To respond robustly to further outbreaks, healthcare systems will likely need expertise within the private sector to deliver the following:

  • Substantial investment: Greater capacity and better infrastructure, deeper inventories of essential and specialist equipment, and diverse means of accessing further supplies in emergency scenarios – such as the current need for ventilators.
  • Greater self-sufficiency: As they deepen inventories and diversify supply chains, national healthcare systems also need to become more self-reliant. India’s ban on exporting antimalarial drugs, which could be effective in fighting the pandemic, exemplifies the risk of relying on a dominant overseas supplier for medications.

These investments will inevitably be fully or partially funded by higher taxes, which will reduce corporate earnings and disposable household income.

Many businesses will have a new appreciation of how suddenly and severely a pandemic can transform the environment in which they operate. To become more resilient, the following measures could be undertaken:

  • Revise business-continuity plans: Many companies will need to strengthen their procedures for maintaining operations in order to prepare for recurrent or extended disruption if the virus is not overcome before a vaccine is widely available.
  • Diversify supply chains: To ensure that if a supplier fails or runs out of stock, or exports are restricted, they still have access to necessary resources.
  • Increase inventories: In recent years, manufacturing businesses have become leaner to increase profit margins by reducing working capital and inventory. They will now likely be willing to sacrifice some profitability in order to hold a supply of critical raw materials.
  • Flexible funding structures: More companies will maintain credit lines with banks to ensure they can survive disruption and limited or no cash flows for several months.
  • Invest in ecommerce: For non-critical lines of business, only firms with a robust online presence can currently stay in front of customers. The virus will accelerate the offline-to-online transition, making internet-based marketing, sales, customer service and distribution management a core part of business.

How consumers will spend their money will change, characterised by a conservative approach to personal finance. 

  • Headwinds for global travel: Following a long boom, the global-travel industry will decline steeply before recovering slowly. It has prospered through intense competition among airlines, the greater ease of independent travel, booking travel independently, the influence of review sites and rise of alternative accommodation. But memories of the rapid spread of coronavirus and the difficulty, or inability, of people being unable to return home amid border restrictions will undermine demand – especially if reinfections occur. Local and regional travel industries will benefit. Chinese tourists, for example, will be more comfortable taking time off in Macau or other parts of Asia than Europe.
  • Shoppers will keep stockpiling: More people will ensure they own greater amounts of essential goods. Convenience stores catering to those shopping for small quantities on a frequent basis may field less demand. Retailers will need to anticipate this demand.
  • Go online or check out: The huge number of people staying at home to prevent contracting or spreading the virus understandably seek to order more of their goods online. But the lengthening delivery timeframes and widespread unavailability of high-demand products – let alone delivery slots for groceries – indicate that even those businesses with established online platforms are being pushed to the limit. This surge in online orders will further embed e-commerce as part of daily life, and retailers that do not develop competitive platforms risk losing many customers.
  • Prudent households: Many people are currently experiencing financial uncertainty. Companies specialising in discretionary products and services, like luxury cars and live entertainment, could suffer amid the return of a savings culture. Consumers will remember this income shock and will seek to build a financial buffer. This is positive for the banking and financial services industry, which, as societies and economies recover, stand to accrue more retail deposits and investment accounts, and fewer poor credit profiles as people aim to control their debts.
  • Insurance: People in emerging markets typically have low levels of health and life insurance. The pandemic is likely to increase demand for these personal protection policies.

This crisis will accelerate and deepen the penetration of technology in the corporate world and delivery of public services.

  • Healthcare: Technology will be hugely important in increasing the capacity of hospitals, making facilities and services more efficient, managing supply chains and inventories, research and testing, and knowledge sharing. For instance, remote surgery, where a specialist controls a robot carrying out a procedure on a patient from a distant location, could become normal practice.
  • Businesses applications: Technology will help businesses better manage inventories and supply chains so they can better respond to supply or demand shocks caused by pandemics. Automation, which has already been adopted by many businesses, will be seen as a way to increase the resilience of operations. Remote working will become more embedded, supported by the ongoing expansion cloud-computing and bandwidth capacity.
  • New lifestyle habits: Greater adoption of online education, shopping, entertainment and even socialising will become embedded in daily life as a result of this period of widespread social distancing.

The secular story holds firm

The corporate landscape that evolves after the coronavirus pandemic will be different to the one we knew beforehand. Like markets, life won’t revert to the mean. Amid the economic damage, there will be innovation and progress, and many businesses will become stronger as a result.

The emerging-markets structural-growth story is driven by an aspiring and growing middle class, increasing digitisation and development by governments through productivity-boosting reforms and infrastructure projects. The widespread disruption caused by the Covid-19 pandemic will change the environment in which businesses will operate in, and this is likely to impact their growth and profitability.

Our focus remains on long-term, structural drivers of growth: the rollout of 5G networks, greater digitisation and applications of the internet of things, rising financial penetration, healthcare and infrastructure development and growing consumer appetite for premium products.  We favour quality operating companies in these fields amid the ongoing economic uncertainty, weak commodity markets and potential credit-quality issues.

Taking this perspective, we view the current environment as an opportunity rather than a threat. While we don’t expect markets to gain substantially in the short term, there is potential to increase our exposure to attractively valued companies that can emerge from this crisis by improving their competitive advantage and compound value for investors over the long term.

This information does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.

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