Sector Intelligence: Impact of COVID-19

As we continue to witness a global crisis of unprecedented scale, professional advice, expertise, and timely intelligence are more critical now than ever before for business leaders across the globe. According to the World Bank, a severe pandemic could wipe out 5% of global GDP, or more than $3 trillion. The COVID-19 pandemic stress tests business models, global supply chains, and war chests of companies globally.

The global economy is heading towards a contraction in 2020, rattling markets and triggering credit stress across the globe. The OECD (Organization for Economic Co-operation and Development) has projected that an escalation in the coronavirus outbreak could cut global economic growth in half (est.1.5%) and plunge several countries into recession in 2020. The crisis remains fluid, getting bigger by the hour, and making line of sight for recovery elusive. Based on the black swan events in the past, there is a consensus on a gradual U-shaped recovery.

A few implications from the outbreak are already noticeable across sectors, regardless of geography:

  • Disrupted supply chains: Demand contraction, local supply shocks and disruptions in the supply chain are evident across sectors (most notably in advanced manufacturing and industrial products).
    • The conditions are likely to deteriorate further as the crisis progresses, triggering the hunt for alternative supply chains. Supply chains across the globe are facing disruptions due to travel restrictions and shortages of labor and inventory. The normalization of operations may take time, due to on-site restrictions mandated by governments and the resulting prolonged home confinements. 
    • Industrial manufacturers that practice a “Just-in-Time” manufacturing model may be vulnerable to shocks. However, a staggered lag between the Covid-19 outbreaks in Europe, North America, and China may help rebuild the missing inventory of parts resulting from the shutdown in China, thereby creating opportunities for better alignment post crisis. 
    • In the pharmaceutical sector, heavy dependency of North America and Europe on Asia for Active Pharmaceutical Ingredients (APIs) may lead to shortage of drugs, leading to drug price inflation. 
  • Regulatory easing and reduced oversight: The elimination of capital and liquidity buffers for banks across the globe will allow banks to support lending across sectors. 
    • Banks will exhibit low deposit betas and increases in non-performing loans for sectors exposed to the crisis, as they work to preserve net interest margins in a period of emergency rate cuts. 
    • Large asset-sensitive banks may cut deposit rates further to match declines in asset yields. Deterioration in credit quality of companies across the globe in a near-zero interest environment is likely to hurt banking sector margins, leading to continued deterioration in banking sector’s RoE. 
    • Debt restructuring solutions may see a strong uptick. 
  • Capital erosion & technology spend: 
    • The Covid-19 pandemic has resulted in capital erosions for major global tech companies. The outbreak has already erased $450 billion of the big tech market cap (Facebook, Apple, Microsoft, Google, and Amazon). 
    • Digital platforms continue to be pressure tested amid the outbreak and technology firms are likely to benefit from an anticipated capex spend on virtual and contactless technologies, smart contracts, block-chain, and cloud, supported by the new use cases adopted to manage the crisis. 
  • Weakness in M&A: The environment will likely remain weak in the near term, which will put larger transitions at risk if the pandemic qualifies for material-adverse effect. 
    • With asset available at heavy discounts and the market adjusting to the new normal, the possibilities of opportunistic M&A are high in the long term. 
    • Companies will likely defer share buyback programs. There is likely to be an uptick in shareholder activism and defensive strategies (poison pills). Many companies across sectors are already noticing large equity sell-offs, which in turn may lead to huge impairment of goodwill/write-downs on corporate books.
  • Debt crisis & energy sector: The US O&G industry has about $86 billion of debt due by 2024. Further, a significant share of distressed debt in Asia is also affecting oil-price declines. 
    • Declining investor confidence and deteriorating free cash flow profile will accentuate the debt crisis and likely result in significant credit rating downgrades for the O&G sector in near term. 
    • The energy crisis in traditional sectors imposed by the pandemic may also create opportunities in clean energy. Carbon emissions will likely temporarily decline due to government-imposed home confinements and the slowdown in manufacturing activity. 
  • New risk-transfer solutions: Businesses are considering invoking force majeure foreseeing non-fulfilment of contracts. Going forward, companies may need to price-in pandemic risk, repurpose force majeure and redefine exclusion conditions in legal contracts and insurance coverage.

A Whole New World Order

Covid-19 is a short-term crisis that represents a long-term opportunity in triggering a new world order. Not only will Covid-19 lead to a parallel creation of “pandemic” economy, it will have a far-reaching consequence on how business is conducted. Economic shock to the global system will simulate changes that will be felt across the globe, regardless of the sector or geography.

These changes will manifest in many ways—

  • A debt-ridden, prolonged recovery across the globe—just coming out of crisis. stable stocks will attract more premium over growth stocks.
  • Increased demand for debt restructuring and resolution-related legal & professional advice. 
  • Redesign of enterprise risk management (include business continuity planning around pandemics). 
  • Increased spending in remote workforce-tech, emerging tech and contactless technologies (telehealth, teladoc services), and cybersecurity. 
  • Activism in green investments, support for sustainable practices and the clean energy crusade. 
  • Diversification of big firms into pandemic-sensitive medical supplies,  and rise in VC (venture capital) and CVC (corporate venture capital) spend by the big tech firms, driven by new uses cases during the crisis. 
  • Hard decoupling of supply chains and a resurgence of domestic supply chains. 
  • Change of consumer behavior. 

In order to understand the collective impact of this pandemic across sectors, Evalueserve takes an informed view on key sectors and subsectors across the globe covering critical updates, near term-risk assessment and long-term implications:

  • Financial Services: When looking at Financial Services across North America, EMEA and APAC, the general near-term risk is high across all sub-sectors including such as Banking, Life & Health Insurance, Asset & Wealth Management, and Private Equity. Monetary policies and quantitative easing (QE) across the globe are aimed at promoting liquidity and stimulating credit, but the demand shock will require expansive and ongoing fiscal stimulus.
  • Energy: The global oil market was expected to balance in the second half of 2020, however the Covid-19 outbreak lowered oil and oil products’ consumption of the largest consumer (China). Overall, the industry’s near-term risk is at a high level with high impact regions including the US, Middle East and Asia.
  • Pharmaceutical, Life Sciences and Health Care: Globally, the sector is expected to experience logistics (i.e., capital projects, regulatory assessment, launch, trial/development) and demand (i.e., refill/physician visits/initiations) disruption for the pharmaceutical industry overall. However, there is relatively far less disruption to be seen compared to most other industries/sectors. Payer/Providers will experience moderate near-term risk globally. The total cost of care provided to Covid-10 affected patients should be offset by the reduction in cost from the cancellation of elective procedures.
  • Automotive: China is the largest auto-component supplier in the world, causing any supply chain disruption in China likely to affect the automotive production across the globe. As the virus now spreads globally, other regions like the Americas, Europe and India are also facing (or are beginning to face) a slump in demand. 
  • Information and Communication Technology: Impact on technology and telecommunications sectors vary somewhat by region. While some sentiments have been negative, others have been cautious but not alarmist.  
  • Consumer markets: Consumer spending accounted for 70% and 58% of the US and China’s GDP, respectively, in 2019. The recent change in the status of Coivid-19 to a pandemic by the WHO (World Health Organization) has severely impacted consumer spending behavior and patterns across the world. 

For a collective view on the Covid-19 outbreak, please reach-out to 

Pratyush Prabhat
Global Head, Professional Services practice Posts
Sangeeta Upadhyay
Associate Vice President, Professional Services Posts

Latest Posts