2022 Back to Basics

One more year, during the last weeks, we could read the usual economic forecasts for 2022 and potential challenges and opportunities in the coming months. Despite the notorious recent failures predicting events like the current pandemic, election results, technological breakthroughs, geopolitical changes, commodity prices, … we keep on trying. Some predictions are based on some sound analysis, while others have the usual rigour you can find in social media.

However, there are already undisputable available data. The most remarkable is about inflation. In 2021 a debate emerged between economists and politicians about its nature: transitory vs persistent. The latter group proved right. Some pundits, like the former US Secretary of the Treasury Larry Summers, pointed it out many months ago. Last inflation data in many counties confirm it: US (7%), UK (5.1), Germany (5.3%), Spain (6.7%), Mexico (7.1%) or Brazil (10.1%). Supply chain shortages will continue in products and now the price of services and salaries are increasing as well.

It will take some time to rein in inflation. Inevitably, this implies that the Fed, the ECB and other central banks will increase interest rates cutting the flood of liquidity western economies had enjoyed since the pandemic started. This will put more pressure on emerging economies. Indebted low-income households will also have more difficulties coping with higher prices and higher interest rates.

Higher interest rates will bring more scrutiny to our investments and the way companies are managed. What implications does this situation have when managing a business? My advice is to be back to basics looking after 3 variables:

1. PEOPLE. Some companies still underestimate the importance of people in the success of a company. The strategy normally fails when implemented and it is only people who make the difference doing it. Technology already provides uniformity in our processes (and it also can be easily copied) so having creative and flexible people in front of our customers is what provides an authentic and differential experience for them. It is the company purpose the glue that ensures a coordinated and continuous willingness to run the extra mile.
2. CUSTOMERS. Empathy is now even more important. Information is available everywhere, so having an excellent product or service is taken for granted. Partnering with customers and understanding their real needs is paramount. Customers are looking for genuine experiences. Strikingly, there are still many decision-makers who have never been in front of a customer.??
3. CASH FLOW. Expect higher capital expenditure costs, increased costs from your suppliers and more tax pressure from cash-strapped Governments. Cash Flow has always been the ultimate gauge to measure the financial health of a company. Now, when this resource will become scarcer and with many market and financial valuations defying common sense, cash-generating companies will be clear winners. Having a solid financial position allows also economic independence and enables focus on the long term (contrary to many public companies enslaved to their rush to meet quarterly short-term results).

Pandemic has brought many changes that will remain. Hybrid work and flatter organisations, more reliance on digital channels or customers more concerned about health or sustainability. It has shuffled the overall attractiveness of some industries. However, basics are basics: we can find companies in every sector that do take care of their people, do empathise with customers and enjoy a solid cash position.?These are the right companies to work for or invest in.

This is my last personal piece of advice in the polarised and strained world we are living in: be opened to listening, be relentlessly curious and have always a well-intentioned and positive attitude facing new challenges.

Enjoy your ride in 2022!

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