After going through a decade and managing to avoid a global recession, 2020 has been a rude awakening as the world plunges into recession and is seeing the sharpest spike in unemployment since the Great Depression. With a lead time of at least two years to commercialise a vaccine, the globe is now trying to adjust to a new normal.
Out of the COVID-19 rubble, questions remain as to how to rebuild our fractured economy. A sickly patient pre COVID-19, the economy went into surgery already weak. Credit rating agencies downgraded our sovereign debt to junk, Government responded by taking drastic steps to try and revive the economy, injecting 10% of Gross Domestic Product (GDP) and the South African Reserve Bank (SARB) throwing caution to the wind by slashing rates by 2.5% to sixty-year lows. Yet we are left with many questions of how we will emerge from the lockdown, stuck between the Scylla and Charybdis of preserving lives at the cost of jobs.
When food giant Pick ‘n Pay skipped its final dividend and accessed banking facilities to build a liquidity buffer, one can’t help wonder how small businesses, that have not been able to trade and are without the balance sheet strength of the corporate giants or access to funding, have any chance of surviving this crisis. With GDP growth estimated to contract anywhere between 10 to 17% (although the data releases are expected to be delayed), and another 10 million people potentially joining the ranks of the unemployed, it is important to recognise the gravity of the present situation. But despite this very dismal outlook, we can still take further actions to prevent a worst-case scenario.
Firstly, while we should protect our elders and the vulnerable, we should plan for a phased return to work as soon as possible. As businesses run out of resources, we cannot afford for them to close down and shed even more jobs. In this crisis, banks can be part of the solution rather than the cause of the problem as was the case in the Global Financial Crisis (GFC). There is an urgent need to advance emergency funding for small businesses and banks are well equipped to do so. The life blood remains capital and this will be required in the form of debt funding to sustain those under funding stress and to revive those facing a liquidity crunch. We estimate that the need will span across the capital structure from investment grade debt, quasi-equity to distressed funding for companies who succumb to COVID-induced business interruption.
While the JSE has been an efficient vehicle in raising capital for listed entities in the past decade, this capital has principally been channeled into offshore forays with, often, a disastrous outcome. We estimate that domestic companies have increased their offshore source of revenue by 30% in the past decade, with the unfortunate result of net liabilities of over 30% of GDP being accumulated offshore.
Businesses will also have to quickly adapt to changes in consumer behaviour. It’s not surprising that the Sage of Omaha dumped his holdings in the largest United States (US) airlines last quarter as he bet that air travel would become more restricted. In fact, the market cap of Zoom, a video service, now exceeds that of seven of the largest global airlines. Likewise, our country will likely see more local travel than inter-continental inbound tourism for a while, sealing the fate of our national carrier. Consumers will also choose to remain at home than go out for entertainment, accelerating the demand for online services. Companies will need to move to an omni-channel model to adapt fast to this change in behaviour. Unfortunately, fallen giants like Edcon took far too long to change their business model and others like Dion Wired paid the price as online shopping for big ticket items became the norm through the likes of Takealot. Even in the US, clothing chains J Crew and Neiman Marcus hit the wall, with car rental giant Hertz on the brink.
Naspers, through its stake in Tencent, is poised to benefit from this convenience trend as demand for online entertainment, ecommerce and home delivery grows. The six largest companies in the world now are the 4A FM: Amazon, Alphabet, Alibaba, Apple and Facebook and Microsoft. New ways of working will also mean that many employees will shuttle between a hot desk in the office and a desk at home, seamlessly tuning into meetings online. In the FirstRand Group alone, we now have over 11 000 meetings online and over 28 000 calls a day, highlighting that technology has become an essential tool in our lives already. And in our Global Leaders Equity Fund, technology accounts for a quarter of the fund.
Globally, Central Banks have expanded balance sheets by roughly $4 trillion, zooming past the GFC highs. Debt accumulated by the non-financial sector globally has also moved beyond the 220% of GDP highs attained during the GFC, according to the Bank for International Settlements. The concern is that we are mortgaging our future and that future generations will have to tighten their belts to pay for this debt. At home, the generic 10-year bond yield spiked to 13% in anticipation of an estimated R100 billion of foreign outflows as we exited the major global bond index. The good news is that buyers came back in search of yield and after some massive auctions, our yields are back trading below the 9.4% levels.
At Ashburton Investments, we are also prioritising channeling of emergency capital to distressed businesses as we believe that now more than ever, companies will be judged on how they impact the economy and save jobs, not the financial returns generated. And therefore, I am proud to be part of a group where shared prosperity is our call to action.