Global degrowth – Our options

With over 1.9mn people infected and 120,438 people dead at the time of writing, we can all agree with UN Secretary General Antonio Guterres that this Covid-19 Pandemic is the greatest threat confronting humanity at the present moment.

Almost all countries have closed their borders, and initiated lock-downs of varying severity leading to an unprecedented slowdown of their respective economies.

For once all Economists, whether Business, Government or Academic, are in complete agreement that the market impact of this virus cannot be estimated with any degree of accuracy as the situation is still developing and there is no end in sight.

These are the hitherto unimaginable circumstances that we are living in where “We don’t really know” seems to be an acceptable answer to most questions.

I am a finance professional who has been associated with the FMCG Industry for over 20 years. During this period I have donned many hats and have braved many a storm, each of which seemed worse than the other. Having said that, I opine with no hesitation whatsoever that the challenge posed by the Coronavirus pandemic will be the most deleterious of all.

A presentation would be made later in the day by IMF Chief Economist Gita Gopinath on the latest outlook for the global economy. I have a sense of foreboding that the outlook is going to be exceedingly bad, both in terms of the degree of de-growth in the global economy and the duration of this ongoing recession.

Amid all this ambiguity and apprehension – business owners and leaders cannot afford to be in a state of flux. They need to be at their perceptive and vigilant best – devising strategies and outlining blueprints to help navigate these uncharted waters.

Know where you are

There have been recessions before and it has been seen that a recession is more often than not accompanied by a recovery as markets rebound. It has also been seen that regardless of the severity of the recession some industries are able to sustain and at times even grow in such a situation.

Some Industries which are least affected by recession, in no particular order are: (List A)

– FMCG Manufacturing and Retail

– Healthcare and Medical

– Education

– Freight and logistics

– Financial Advisory

– Repairs and Servicing

If we are in one of the above sectors, we are in a much better position than those in Tourism, Entertainment, Travel, Construction, Cement, Motor Vehicles, Furniture, Printing, stationery, Office supplies, etc. etc. (List B)

List out your options

If you are an investor whose investments lie in ‘list B’ above you are in for some challenging times. 1st option would be to secure the capital and get out before further erosion of the net worth. If that is not possible then one has to batten down the hatches and get ready to ride out the storm.

‘Survival’ becomes the mantra not ‘growth’. Reduce, release, renegotiate etc. need to be your buzzwords. The people whose investments are illiquid to begin with and are in the affected industry are the ones who will lose the most as their options are severely limited.

For a diversified group – with investments in both A & B list industries – focus must be on reducing their exposure in the ‘B List’ and maximize their investments in the Industries doing well. Secure the capital of the B List industries (even if it is marginally eroded) and invest those funds into the A List. The trickle-down effect of the global recession would result in further erosion of the net worth of the B list industries anyway.

If your investments are in the A list – you would be one of the very few who would stand to make money in spite of this unprecedented downturn. You can improve your profitability by increasing the size, capacity and reach of the industry if possible. If you are in a position to raise funds then the world is your oyster as you would be able to pick and choose acquisition targets for vertical integration.

In conclusion

In a recession the ones who lose most are the ones who are unable to act due to lack of options or those who act in haste. Here is to hoping that we don’t fall in either bracket.