Nordea's Johan Trocmé, Director of Thematic Research, and Viktor Sonebäck, Analyst at Thematic Research, discuss how Nordic corporates are already starting to feel the impacts of the spread of coronavirus (COVID-19) and will need to make preparations for the bumpy road ahead.
COVID-19 is a pandemic and it is going to hurt the economy – badly
Since we released previously wrote about coronavirus and supply chains at the beginning of March, efforts to contain the pandemic have caused a clear disruption to economic output. The spread needs to be slowed to prevent healthcare systems from being overwhelmed, and insufficient intensive care capacity is causing the number of fatalities to soar. Hundreds of millions of consumers in Asia, Europe, and the Americas are unable to work and shop, and this number will likely increase. With no vaccine likely available until 2021, containment efforts could be recurring through 2020. We argue that corporates should assume this will be the case, and plan accordingly.
Capital markets reeling from uncertainty in tug-of-war with policy maker stimulus
Global equity markets have tumbled, corporate credit spreads have widened sharply, and corporate bond issuance has shrunk to a trickle, as investors have realised and started to discount the magnitude by which global economic output will slow from Q2. Unprecedented liquidity and other monetary policies from central banks, accompanied with record fiscal stimulus and loan guarantees from governments, are offering much-needed support, but will not eliminate the massive dent to corporate profits and cash flows that will be caused by the economic standstill in the short term.
Unprecedented monetary and fiscal support will not eliminate the massive dent to corporate profits and cash flows that will be caused by the economic standstill in the short term.
Johan Trocmé and Viktor Sonebäck, Nordea Thematic Research
Corporates must secure liquidity, funding, and equity to get through a turbulent 2020
Our sensitivity analysis for ~200 listed Nordic companies, based on input from our equity research analysts, suggests a scenario with a 10% fall in demand for 2020, triggering a 90% drop in aggregate EBITDA for Q2, as cost reductions will need time to catch up. The worst-hit sectors would be industrials, discretionary consumer products, and energy, all of which will likely show deep losses in the quarter. With 15-40% of their bonds maturing in 2020-21 (EUR 27bn of bond maturities remaining in 2020), corporates need to secure liquidity, funding and – as needed – new equity, to navigate through 2020 and do business in 2021 and beyond.
Tomorrow’s supply chains need to be more robust, also within Europe – just consider post-corona Italy
Current corporate focus should be and will be on crisis management right now – but we want to plant a few thoughts about what supply chains and footprints should look like when the COVID-19 pandemic is behind us. Supply chains may need to become less lean, to reduce volatility from potential disruption to tolerable levels. Companies should re-think lowest-cost sourcing from other continents to account for potential trade barriers and other risks of supply shortages. Political risks may also need to be reconsidered within Europe. Using Italy as an illustrative example, its already vulnerable economy could be wrecked by the coronavirus disruption – the probability of a Brexit-like scenario may be low, but is not zero.
You can read a summary of Nordea on Your Mind’s ‘Coronavirus and supply chains’ report here.
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