COVID 19 – SOME ECONOMIC & INVESTMENT FALLOUTS

The world turned, as it were, “on its head” in a spate of just ONE MONTH and we are still watching and gasping at unfolding events. As the global economy reels like a drunken sailor, there are huge economic implications across industries and sectors and of course as always, there are losers and winners. Now officially declared as a Pandemic of global impact, projections of potential global infections range between five hundred million people, at its most conservative and over half of the world’s population (close to four billion) lives at its highest. There seem to be no doubt in anyone’s mind that this is the most drastic fate that has befallen the world in the last century to date.

As at March 25, global cases were 402,054 with 17,507 deaths, with all 195 countries of the world affected. The top 3 hit countries are China, Italy and the United States of America with 81,171, 63,927 and 46,168 infections and 3,277, 6077 and 582 deaths respectively. In Africa, the worst hit are South Africa, Egypt and Algeria.

China, where the pandemic first broke out has today been declared wholly free of COVID19 bringing both a ray of hope that the virus can be fought to a halt (not without significant loss of lives) and a specter of the huge costs of the attack of the virus to a Nation. If there will be long lasting effects of the nature and quantum of antiseptics sprayed liberally, drugs administered to the victims and of the near total shut down of domestic economic activities, only time will tell. But for now, China appears to be COVID-19 free, and economic activities have resumed across the country. Clearly, the Chinese economy (in a foretaste of what other economies across the globe are now witnessing), suffered significant devastation in the first two months of 2020 and the general feeling is that the nightmare is far from over. In this period, retail sales fell by 20.5% year on year, industrial output was down 13.5% and fixed asset investment by 25%. Leading sectors like its aviation and motor vehicle industries which are collapsed during this period.

Once again, the world’s economies are witnessing the underbelly of globalization. Hand in hand with opportunities such as access to both global funding and global markets for domestic companies, come vulnerability to borderless crisis such as “imported” financial crisis and now borderless diseases easily transported as people travel across the globe for economic and leisure activities.

Major economies like the United States of America, the United Kingdom and Europe have not fared much better, with these markets still counting their losses as the Coronavirus pandemic continues to cause massive human and economic losses in these nations.

On the back of these developments, the International Monetary Fund (IMF) has in a statement issued on Monday 23 March forecasting that COVID -19 will trigger a global recession that could be worse than the global financial crisis of 2008-2009, but with a hope of recovery in 2021. To combat the economic effects of the plague, the US Congress has approved an unprecedented Stimulus package of USD2Trillion.

As the coronavirus crisis rages on, medical facilities in the most advanced nations are overwhelmed. Leaders and citizens alike have been completely blindsided. Emerging market economies are doubly hit because the high levels of poverty, hunger and disease stand a great chance of being exacerbated by this crisis and the drastic measures (lockdowns and business shutdowns) required to fight it which could prove unbearable for the huge numbers leaving on daily income and below poverty level. Without cautious implementation and palliative measures, these could engender greater destitution, public riots and elevated crime levels in addition to the ongoing health crisis.

Nigeria’s stock market shed NGN2.2Trn in two months and the bloodletting is far from over. Nigeria has now recorded 46 cases of COVID19 including very senior public officers and personalities. Our economy has also witnessed other drastic adverse impact in the shortest time with crude oil prices crashing from over USD60to below USD30 and predicted to fall to USD20 whilst the yield on FGN 6.75% Eurobond issued at a yield of 7%, has spiked to 12.8%. In response, the Central Bank of Nigeria, CBN has now marked down the exchange rate of the USD for NGN from NGN360 to NGN376 to NGN380 to USD1.

With the fall in demand from China and Saudi/Russia price war, Nigeria is reportedly facing challenges moving its crude at an acceptable price.We appear headed back to recession with half of the projected oil revenue in jeopardy, and foreign exchange reserves under intense pressure if the Federal Government continues to defend the Naira.

Everyone seems to be counting losses as economic activities grind to a halt, businesses face reduced activities and incomes yet higher operational costs to meet new government-imposed standards (e.g. for Public Transporters, banks, shopkeepers) where they’re not completely shut down. Restaurants, Clubs, Playgrounds and businesses considered non-essentials are shut down. Others like banks are to maintain skeletal operations. The medical operators are open but struggling to battle the scourge with inadequate resources and at great risk to life. Demand for luxury goods and fashion items and grooming has naturally dropped as people tackle existential issues

Will there be any Winners?

These could include the pharmaceutical industry, laboratories, medical equipment, home delivery food, food marts, supermarkets, drugs and toiletry stores which are experiencing huge demand due to lockdowns as well as panic buying and binge shopping. As we all change our mode of work, school and play, the Technology, Online Education, Online Games and Digital Technology and Netflix could be winners.

COVID-19 has once again brought to the fore the vulnerability of a commodity dependent economies to global commodity price volatility on the back of a crisis like this one. The sharp drop in global demand for crude oil and consequentially in Nigeria’s government revenues underscores the imperative for alternative products. Alternative sectors like agriculture, solid minerals, healthcare, information technology, education, alternative energy offer scope for more investments as we see a shift in government incentives and private sector spending.

The impact of the supply glut in drugs, medical equipment, manufacturing tools, production equipment etc. arising from shutdowns in China is a huge lesson on the imperative of backward integration and having control of supply lines. With government backing, local manufacturers should explore opportunities to redesign their models.

As governments across the world are forced by this crisis to recognize the critical importance of the entire health sector value chain particularly pharmaceuticals, medical investigations, equipment production and primary healthcare, the Nigerian government which has traditionally underinvested in health and education is revisiting the implications of such choices. The Central Bank of Nigeria has signaled a changing approach with its recent decision, (as part of its NGN3Trn COVID19 economic package) and working with the Bankers’ Committee, to support the country’s leading pharmaceutical companies to import and produce needed drugs, through FX facilities. As initiatives like this continue, it is expected that, this space is expected to open up immediately.

It is essential in investing to recognize the impact of boom (when luxuries like cars, perfumes, fashion items, holidays, resorts and cruises thrive) and bust markets when only essential goods and services thrive. This means your diversification decisions should look beyond geographical, asset class (e.g. equity, debt, derivatives) and sectoral considerations to the nature of the underlying products and services rendered by companies in which you invest. This way you ensure that your entire portfolio is not losing at the same time.

The global erosion of value on account of a major disaster like this does not erase the underlying intrinsic value of the stocks of well-run companies with viable products and established demand over time. So depressed prices offer an opportunity to invest again in companies with strong fundamental.

The current crisis is likely to bring in its wake an accelerated shift in the way we work, learn and do business. As we learn how effectively we can work and learn remotely, the potentials of certain technology products become evident. This could be a good time to invest more in VPN, online education, artificial intelligence and digital technology.

Forward looking companies may look at harnessing and retaining the efficiency gains of remote and flexible working by reducing office space, physical consumables, power and utilities.

Conclusion

As the world continues to battle the huge humanitarian impact COVID19 pandemic, the economic implications cannot also be overlooked. In managing the adverse fallouts, markets and investors must critically examine the opportunities for realignment of investment priorities, asset allocations and of government budget spending. 

Toyin F. Sanni

Lagos, March 2020

Toyin Sanni is CEO of the Emerging Africa Capital Group, a leading African Investment Bank providing Finance and Capital Solutions, Wealth Management, Trusts and Asset Management Services.