29 May 2020
Martin Dropkin | 22/05/2020
We recently surveyed our team of analysts across the globe to get the on-the-ground view of what they’re hearing from companies. This month’s findings reveal the rising dispersion across and within sectors, as well as the profound impact the Covid-19 crisis will have on how companies approach social issues. What would a move to stakeholder capitalism mean for company margins?
The health of staff has been at the forefront of company managements’ minds, and analysts from just about every region and sector confirm that companies will devote more attention to employees’ safety and wellbeing in the future.
How will the Covid-19 crisis affect your companies' approach to social issues?
Our analysts report that European telecoms companies have been offering free data or devices to people in vulnerable demographic groups and have been offering support to governments and hospitals. Healthcare and pharmaceutical companies are acutely aware of their central research and development role in the global pandemic. They are keen to avoid the perception of profiteering and some companies are developing vaccines with plans to initially distribute at cost price. This would at least temporarily undermine the bottom line.
One consistent message across many sectors and regions is a new focus on employees. This takes the form of improved safety, but also a longer-term effort to improve employee satisfaction with better conditions and in some cases, higher pay.
The survey responses demonstrate that the pandemic will accelerate a wider move towards stakeholder capitalism. The crisis has highlighted that demonstrating good corporate citizenship and support for the communities in which the sector operates is now an essential part of building and sustaining brand equity. The future could see companies prioritising society and employees over shareholders.
How persistent the post-virus changes prove to be, and whether additional costs will depress margins, will emerge in the months to come.
Other parts of the survey reveal that the current environment is still very challenging for companies. Cuts to earnings forecasts are about as large as those expected last month, whether the disruption abates from here or continues for the rest of the year. Our analysts also forecast more near-term pain for employees - workforces are set to shrink by a further 7% in the next six months.
Meanwhile, the proportion of analysts who expect the decline in demand to be permanent, rather than temporary, has edged up from 39% to 45% globally. Europe may suffer the most, with 62% of respondents expecting demand destruction. In materials, that proportion increased from 44% in April to 56% this month.
Do you expect the decline in demand caused by Covid-19 to be delayed or to be lost forever?
However, underneath the averages, dispersion is rising both among and within sectors and regions as the extent of the downturn becomes clearer. Consumer discretionary and industrials analysts are more optimistic than last month, while financials analysts are less so.
The rising optimism among consumer discretionary analysts is particularly interesting because the sector has been hit hard by lockdowns enacted to curb the virus’s spread. As these measures are gradually relaxed, many companies within the sector are beginning to understand a potential road to recovery and guidance from company managements reflects this.
Across China and the US our analysts note that as lockdown rules become more relaxed, demand is expected to improve - aided by stimulus measures. However, even within the sector, there is considerable variation. Within Europe our analysts feel less optimistic, predicting that returning to normal in this sector will not be a 2021 event but more likely 2023 or beyond.
The theme of winners and losers beginning to emerge echoes throughout the survey responses. Those firms with an existing online capability have done and will continue to do better than those without. To be online is to be in demand and the information technology and telecoms sectors are benefitting from the lack of human movement. This is a trend that may outlive the Covid-19 crisis, as one Europe equity IT services analyst reports: “Longer term I think it drives IT adoption.”
More analysts report that leading indicators in their sectors are positive this month compared to last month, a sign that while conditions might be harsh, at least some optimism is slowly building. It might be too early to call this the turn, but analysts are reporting that companies are beginning to set their sights on a strategy for recovery. China is still ahead in this respect, but other regions are starting to show signs of life too.
Important information
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of investments in overseas markets. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only.