Governments have to weigh feedback loop of health and business crises
Though the Covid-19 pandemic is unquestionably a health crisis, focusing only on the health aspects of the virus is too narrow a perspective. Much more is occurring than a health-care challenge.
The global financial crisis of 2008 originated from poor financial practices. The lasting consequences of the financial crisis led to a business crisis, which led to a health-care crisis. The health-care consequences of the global financial crisis are rarely explored or discussed, but there was a dramatic increase in chronic and mental health illnesses due to the stress caused by the financial and business crisis.
The Covid-19 pandemic started as a health-care crisis. The full health-care implications are still being determined. One of the key solutions to the health crisis has been a global lockdown. These lockdowns have created a business crisis, which has led to a financial crisis. We are now in the midst of that financial crisis. This is likely to lead back to an additional health-care crisis as it begins to affect those susceptible to chronic and mental health illnesses. This is not getting much attention, yet it is equally concerning.
Getting the balance right to manage all these dynamics is an unenviable task for governments. How they deal with it will affect how deep the financial and consequential health-care crisis goes.
From a health perspective, it is important to reflect on where and how the virus has been most dangerous. All indications are that Covid-19 has attacked the already health-impaired most severely — people with pre-existing lung, heart and other morbidities.
From a business perspective, the lockdown has done the same to companies that were already in peril. Companies that were frail before lockdown have already closed up shop. Many others are in deep trouble and are unlikely to recover. The companies that were strong before Covid-19 are surviving and making things work, even though the environment is brutal. Those that are innovative and nimble are thriving.
Investors in companies should think carefully about how to proceed. We need to unemotionally review our companies and develop our strategies based on the following principles:
Ensure the company is liquid — it should not have too much debt and should have the cash flows to sustain itself. If it does, you have the right to have a discussion about the future; if it does not, it is a case of when, not if, it will close down;
Adopt a triage approach — dispassionately determine the most critical projects within a company. It is unlikely you can continue to try doing what you did in the past. Only projects, divisions and businesses that deserve the right for future funding should get that funding. Ignore what will not ensure survival into the future;
Right-size the business — restructure the business, particularly the balance sheet, to ensure its resilience. This challenge will evolve and further challenges will come along. Only the strong will survive.
For business executives, this is the perfect opportunity for introspection. We need to think carefully and clearly about what made us achieve what we have to date. We need to reapply and rethink this, using all our ingenuity and creativity to find the solutions that will be needed for the future. There are opportunities now and there will be even more in future.
The future will provide big opportunities for those who want to help meet evolving consumer needs. The world will not be what it was. All our needs have changed and we will continue to transform. We cannot rest on our laurels and rely on the solutions of the past. Now is the time to work smartly. That will keep us relevant and ensure we continue on our upward trajectory.
While there are challenges and opportunities within the business environment, there is a disconnect to what is happening in investment markets. Investment markets are forward-looking pricing machines that try to value an asset 12-24 months into the future. What is in the news now has mostly been factored into the day’s price.
The biggest reason for the investment market disconnect to our immediate reality is embedded in the saying, “Never bet against the Fed”. The central banks in the US, UK, Europe and Japan have said they will do whatever it takes to protect their economies. They are doing this by pumping money into the financial system. With the property market being severely impaired and interest rates close to zero and negative, there is nowhere else for it to go. Most of the available funds are going to the investment markets, which is pushing up values.
While this is good news for investors, there is one huge caveat: governments are building up a huge debt burden that will need to be repaid by future generations — unless world economic growth is spectacular. Not quite the legacy we would want to leave to our children.
• Bradley is CEO of Fiscal Private Client Services.
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