An Anchor for Analysing the Post-Lockdown Corporate Environment
Fitch Ratings has published 'The Road Back' , an analysis of our expectations for corporate revenue in the coming 18 months as global economies emerge from the coronavirus pandemic. Our projection is conservative, but may prove to be optimistic - there very well may be darker paths than our own 'Road Back' analysis, especially should the world face a second wave of lockdowns over coming months. We nonetheless felt it important to lay down an anchor expectation against what will be a volatile period for news.
Fitch analysts have concluded over 1,000 corporate rating reviews since the start of the year, gathering a detailed panorama of their own expectations for the next stage in the coronavirus crisis. That collective view faces an onslaught of conflicting sentiment as the major developed markets struggle to recover from lockdown. At first, we expect to hear much of a sharp upturn in new economic data. This is not only unsurprising, but is entirely predictable based on the scale of the enforced economic shutdown. Assuming performance is close to Fitch's baseline scenario for the pandemic, positive news in 2Q20 will be an improvement that is necessary. But it will not be sufficient for the restoration of normality.
This flurry of positive bounce-back news will be replaced, as we move into the 2Q20 earnings season in July and August, with a sobering window onto the revenue destruction of the lockdown period. While normally a quiet period in the markets, the contrast will weigh on sentiment, from Main Street to the C-Suite.
Our projected recovery curves in our 'Road Back' analysis assume that corporate management teams will not be too distracted by the conflicting noise of positive and negative headlines. Knives are being sharpened now to slash all extraneous costs, a process that will move inexorably forward even if temporary brightness flickers into the forecast in the coming months. The risks of a recurring downturn in 2H20 are too substantial, and too unpredictable for most corporate management teams to ignore. Optional, expansionary or experimental expenditure in even the most secure sectors will face very high hurdles for 're-approval', even in the most benign re-opening scenarios.
Our report suggests that the median revenue decline for 2020 will be 15%, in other words a decline shared by many sectors, not just the worst affected. Management teams in most cases will be unlikely to assume a lower number. Even the relatively stable services sectors will be frugal in, for example, their sales and marketing budgets. This will have major knock-on effects on employment and consequently wider consumer sentiment. At the other end of the scale, our report forecasts the leisure and transport sectors losing more than half their revenue in 2020-21, an impact that will be felt far more widely in this largely unrated group than the statistics of our rated portfolio will suggest.
Our 'Road Back' analysis provides an anchor assessment of aggregate corporate fortunes over the next 18 months, assuming our baseline scenario holds. It provides a holistic view across almost 90 sectors and sub-sectors globally, and their expected - and in many cases slow - return to 2019 levels. Some sectors will doubtless fare better, and some will fare worse than our anchor case.
Judge for yourself whether you agree with our expectation of the "return to normal", from our report, or from our related webinar.