Abu Dhabi, UAETuesday 2 June 2020

Companies that retain staff and conserve cash best placed to survive pandemic

Consumer spending patterns are likely to be shaken as a result of higher unemployment, Majid Al Futtaim Group chief executive said

Kevin O'Leary, head of O'Shares ETFs and an investor on the US TV show Shark Tank, told a World Government Summit virtual event that  companies will learn to operate using 20% less office space. AFP
Kevin O'Leary, head of O'Shares ETFs and an investor on the US TV show Shark Tank, told a World Government Summit virtual event that  companies will learn to operate using 20% less office space. AFP

The companies that will emerge the strongest from the economic shock caused by the Covid-19 pandemic “are going to be those who have taken care of their people, who have built enough liquidity buffers and have the ability to be able to preserve their cashflow”, according to the chief executive of Majid Al Futtaim Group, Alain Bejjani.

Speaking at a virtual event organised by the World Government Summit on Wednesday, Mr Bejjani said recovering from the global pandemic, both in terms of the health crisis and the economic setback, is “going to be a long haul”, given the knock to consumer confidence caused by higher unemployment.

“People are telling us … we are going to continue to consume, but we are going to be much more value-driven, and we’re going to have much less disposable income, and we’re going to try to save more because we don’t know what the future is going to look like. There is fear about the future,” Mr Bejjani said.

Unemployment numbers in the world's biggest economies have grown in recent weeks. The number of people claiming unemployment benefits in the US has increased by 36 million since March, and in the UK the number of benefit claimants rose by 69 per cent in April alone, hitting 2.1 million.

However, speaking on the same panel, Kevin O’Leary, the chairman of O’Shares ETFs and an investor on the Shark Tank television show in the US, said he was "not as pessimistic about a global recession”.

“This was a self-imposed recession that occurred over a 3-week period,” he said, arguing that on average recessions last 12-18 months but are generally driven by an economy that grinds to a halt.

“That didn’t happen here. This happened basically in 48 hours. So the pent-up demand is still there,” he said. He pointed to the reaction by equity markets, stating that if an assumption can be made that a vaccine or treatment is available within 18 months there will not be a long-lasting impact.

“You’re starting to see why European, Asian and North American markets are holding within 5-10 per cent of their highs. People are optimistic that this recession will be short and will be replaced by almost a knee-jerk reaction back to the global business that was occurring prior to the shutdown 90 days ago.”

Mr O'Leary said there are opportunities for investors within certain areas like technology, stating that an index of 50 of the biggest internet companies has risen in value by about 20 per cent in the year-to-date.

“All e-commerce was about 16.2 per cent [of retail sales, ex-automotive], going into this pandemic. Today, in the US we’ve reached 25 per cent,” he said. “What should have taken five years, according to analysts, has taken 90 days.”

Commercial real estate is one area that is likely to suffer, he said, as firms embrace remote working more widely, leading to a need for less office space. In a portfolio of 51 companies he has invested in, "we have come to the conclusion that we’re going to be able to reduce our use of office space by about 20 per cent, on average", he said.

He has reduced his own exposure to real estate to 8 per cent, from about 30 per cent previously.

"I’ve sold all REITs. I think they’re going to be impaired for the next 4-5 years," he said.

Sarah Hewin, Europe and Americas chief economist for Standard Chartered Bank, said that although policymakers and central bankers had “been very proactive” in terms of their reaction to the crisis, there are still likely to be long-term implications.

“Companies went into this crisis with pretty high levels of debt and revenues have, in many cases … fallen off a cliff. Unfortunately, we are going to be seeing some shakeouts in certain sectors,” she said.

On Wednesday, Fitch Ratings said the number of corporate bond issuers with a negative outlook had increased to 22.5 per cent by May 15, up from just 9.8 per cent on March 1.

For financial institutions, 38.1 per cent now have a negative outlook, compared to 10.7 per cent on March 1.

Speaking on an earlier webcast on Wednesday organised by Abu Dhabi Global Markets, Bhavin Shah, a financial services partner at consultancy firm Roland Berger, warned that the Middle East was also likely to suffer from the effect of lower prices, which will lead to a tightening of liquidity.

He said that banks are likely to face issues around bounced cheques, non-performing loans, exposure to defaults in the real estate sector, and even inter-bank exposure.

However, he said that lenders have been given the chance to plan ahead.

“There is a huge wave of tide likely to hit the financial sector,” Mr Singh said. “We’re just seeing the tip of the iceberg and the early indication today. The good thing is we have 4-6 months to prepare for such tide.”

Updated: May 20, 2020 10:29 PM

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