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This month’s Fidelity International Pulse Survey shows growing optimism among analysts over the path of the Covid-19 outbreak, with business disruption estimated to come to an end within 10 months, according to the global aggregate of responses.
China leads the recovery, with a wait of just under 6 months expected for business to reach stability. The country’s economic momentum “has definitely gathered pace”, a materials analyst reports, noting that consumption of iron ore is at all-time record.
Some analysts are already reporting an end to Covid-19 disruption. Some Chinese industrials companies, particularly those that have largely domestic exposure “have rebounded to pretty much similar levels versus pre-covid-19 or even slightly above” says one equity analyst.
Energy and financial companies have the longest journey back to stability, of around 14 months, while, looking at regions, Eastern Europe Middle East and Africa with Latin America (EMEA/LatAm) will take 14.5 months to return, due to continued Covid-19 outbreaks. The region is struggling to contain the virus and the effects could be long lasting. A Latin America financials analyst says that the “Covid-19 crisis could leave deep economic and social wounds in the region.”
Meanwhile, financials analysts expect the return to stability in their sector to take more than 12 months, in part because lenders will have to restructure troubled loans once government stimulus programmes end later this year. A North America financials analyst says: “Continuation of these stimulus programmes for longer or shorter [periods] will be the key determinant of activity levels and ultimately the eventual credit experience as we come through the other side of this.”
The generally upbeat picture is confirmed by a noticeable jump in the proportion of analysts seeing positive leading indicators in their sectors.
The energy sector has seen the greatest improvement in fortunes, led by the stabilising price of oil, with 73 per cent of analysts responding that leading indicators are positive, up from just 8 per cent two months ago.
April was the nadir – featuring a tense geopolitical price war, a briefly negative oil price and concerns over growing inventories. However, since then, production cuts have been implemented faster than expected, pushing the spot price back in to positive double figures, and lifting the 12-month prospects of energy companies.
What stability looks like
When business activity does stabilise, and the Covid-19 crisis passes, it will do so at levels below those seen in 2019. The global average of analyst responses shows that activity will be 2.9 per cent lower than pre-Covid levels, while activity in China is expected to be 2 per cent lower, and Europe will be 4.4 per cent lower.
The outlook for the consumer staples sector is good, with activity expected to stabilise 4 per cent higher than 2019 within the 10 months. Only healthcare fared better, with a reading of 6.6 per cent.
Meanwhile, activity in the consumer discretionary sector is expected to stabilise at a level 8.7 per cent lower than seen in 2019.
While sentiment has improved due to store openings and signs of “pent-up demand,” as a North America consumer discretionary analyst puts it, the sector’s reliance on in-person retail weighs on prospects, with social distancing measures reducing traffic to stores. Added to this are concerns over whether the scale of future government stimulus will match those seen earlier in the year and be enough to keep consumption buoyant despite rising unemployment.
In the entertainment and travel industries, earnings aren’t expected to return to normal until a vaccine is found. “People need to feel safe,” says a Europe consumer discretionary analyst.
However, by the end of 2021 all sectors are expected to be at or above pre-Covid levels, with IT and healthcare sectors more than 10 per cent higher, double the global average of around 5 per cent.
The road to stability will be paved with job cuts
However, before companies get back to a stable footing, our analysts expect them to shed jobs. Almost 50 per cent of North America analysts expect permanent reductions in workforce size, compared with two fifths of Europe analysts, just 5 per cent in China and a global average of 33 per cent.
Workers in energy and industrials will be hit hardest, with 64 per cent and 52 per cent of analysts expecting permanent job cuts respectively. Some analysts are bracing for a feedback loop between layoffs and activity in the consumer discretionary sector. One Europe analyst reports that “retailers all talk about layoffs as the demand outlook is subdued, not only due to low confidence but also due to social distancing. Hence [the drop in] consumption from unemployed retail employees will be the biggest problem.”
On the other hand, analysts in the consumer staples and IT sectors expect around a 10 per cent permanent increase in staff levels.
IT has managed to benefit from its central role in the shift from office to home-based work during this crisis, but trends over the past decade have also helped the IT industry stabilise itself more quickly than others. A North American IT analyst remarks that corporate IT budgets at clients of the companies he covers are more resistant to shocks than before because chief technology officers “have greater responsibility, which means they get a larger percentage of a company budget.”
Analysts expect any sharp move down in wages to be temporary, with only 9 per cent, on average, forecasting permanent pay cuts across their sectors. Wages in the energy sector are most at risk, with over four in five analysts expecting a temporary or permanent cut in wages, while two thirds of consumer discretionary analysts see a temporary cut in remuneration.
Focus on society
Despite the urgent focus that the Covid-19 outbreak has placed on corporate survival and financial strength, analysts report that environmental, social and governance factors are taking precedence over profit maximisation. Only 15 per cent of analysts said their companies would not be willing to sacrifice some earnings to pursue a more sustainable agenda.
The biggest shift, as reported last month, has been the increased focus on societal issues. This month, the survey found that this trend will outlast the Covid-19 outbreak in some areas. Fifteen per cent of North America analysts, a higher proportion than in Europe, said they expected the majority of social-oriented changes in the companies would be permanent.
One of the key factors is social unrest and mass protests. A Europe consumer staples equity analyst says that “the event that could drive greater social change is the George Floyd killing in the US.”
A good example of Covid-19’s social consequences on business is a change in the role of banking, with lenders playing a utility function in distributing government stimulus packages and helping borrowers through their period of financial difficulty.
A Europe financials analyst makes a remarkable observation that “banks are regarded as a social good more than ever, not profit maximising corporations,” while a colleague covering EMEA and Latin America reports that the “restructuring of troubled borrowers has become fairer and can stay that way.”