What are the economic impacts of the global pandemic on businesses and industries?
By Lorraine Zhu
With the number of confirmed infections worldwide hitting one million this week, the economic fallout of COVID-19 has started to challenge virtually all sectors in today’s global economy. The panic was first felt in the financial markets: Since China reported its first death from the virus in January, global stocks have tumbled more than 30%, and the past few weeks of volatile trading triggered multiple circuit breakers in U.S. markets. (A circuit breaker is a temporary trading halt used by exchanges to curb massive sell-offs. For example, a Level 1 circuit breaker, which halts trading for 15 minutes, will be triggered if the S&P 500 falls 7% intraday, according to the NYSE.)
The recent market meltdown evokes memories of the 2008 financial crisis. Stocks tumble, corporate bond yields surge, as investors rush for cash and the shortest-term Treasurys. However, the economic downturn caused by the coronavirus could be far more alarming than what happened in 2008. Today, as countries tighten their lockdowns – closing borders, idling factories, shutting down gyms, bars, and restaurants – the economic trade-off in fighting this pandemic is reflected in sharp declines in consumption, business investment, and international trade. Many industries are taking on huge losses as they struggle with the abrupt halt in the economy; but for some, a global epidemic presents new business opportunities. Here’s a snapshot of the winners and losers of COVID-19.
As more U.S. states enact stay-at-home orders and more people around the world begin taking social distancing seriously, airlines have borne the brunt of the coronavirus crisis, canceling most international flights and further scaling back domestic routes. United Airlines [NASDAQ:UAL], for example, estimated that its year-over-year revenue loss during the month of March would reach $1.5 billion. To cut costs, carriers such as Delta Air Lines [NYSE:DAL] and American Airlines Group [NASDAQ:AAL] have implemented hiring freezes, early retirement, and voluntary unpaid leave up to a year.
According to trade association Airlines for America (A4A), which represents nine major airlines, insolvency is a likely scenario for some of its members by the end of May in absence of federal assistance. U.S. airlines are currently seeking a $50 billion aid package – three times the size of the post-9/11 bailout – which can potentially include cash grants, tax reliefs, and government-backed loans, from the federal government. However, the proposed package is subject to congressional debate as lawmakers weigh a corporate bailout against workers’ welfare protection.
Similar to aviation, the hospitality industry is another hard-hit sector in the pandemic amid the flurry of cancellations of business trips, conferences, sporting events, and vacations. Marriott International [NASDAQ:MAR], the world’s largest hotel group, announced plans to furlough tens of thousands of hotel staff – ranging from general managers to housekeepers – along with two-thirds of its corporate employees in the U.S. and abroad. “Our business is already running 75% below normal levels,” said Marriott CEO Arne Sonerson, who himself has forgone his salary for the rest of the year. The hotel giant also announced that it would suspend dividends. Its shares are down nearly 50% in March, compared to a 20% slump in the S&P 500. Like airlines, hospitality industry leaders are collectively seeking a bailout, asking for a $250 billion package from the Trump administration. Again, this raises the question of whether governments should prioritize bailing out large corporations or compensating affected workers in the event of a national emergency.
Small Businesses & Fintech
When it comes to withstanding shocks of the coronavirus, small businesses are certainly facing more pain than larger, more resourceful companies. This is because they are often more constrained in their cash flows and ability to obtain credit, and less diversified in their revenue streams and customer base. As a result, many small businesses simply can’t afford the same measures as their larger counterparts: Starbucks [NYSE:SBUX], for instance, learning from its experience in China, has shut down its dine-in services and switched to take-out and drive-through orders in the U.S while continuing to provide employee compensations and mental health benefits. The global coffee chain is also financially resilient enough to launch a buy-back program of 40 million shares. Such capital resources are simply unimaginable for small coffee shops. In March, the Small Business Confidence Index fell to a seven-year low of 91.7 and is expected to plunge further as the outbreak escalates.
Fintech companies and payment processors are bracing for the immediate impact of the virus as well, as their clients are typically small businesses like retailers and eateries. San Francisco-based fintech firm Square [NYSE:SQ] sells payment software and hardware (most notably, their ubiquitous credit card readers) to small business owners and earns fees on transaction volumes. Leveraging its access to massive payment data, Square has also delved into creditworthiness and extends loans to small businesses. Under current circumstances, the slump in in-store consumption and higher risk of small-business bankruptcy has taken a toll on Square’s profitability: The company’s market value has been slashed by half since the end of February.
Healthcare & Consumer Staples
The new quarantine lifestyle has shifted consumption patterns as people stock up on necessities such as food, medicine, and cleaning supplies. Naturally, sellers of these products are expected to see a boost in business. Among the 11 sectors of the S&P 500, consumer staples was the strongest performer amid the recent market sell-off. For instance, retail giant Walmart [NYSE:WMT], which operates 4,700 brick-and-mortar stores in the U.S. along with online grocery pick-up and delivery services, received a stock rating upgrade from neutral to outperform from Credit Suisse, due to “a more defensive near-term view on U.S. retail amid COVID-19 concerns.”
Believing that the ultimate solution to the coronavirus is through a medical cure, investors are also putting faith in big pharmaceutical companies. While the spreads on investment-grade bonds and speculative-grade bonds are up 1.23 and 3.91 percentage points respectively this year, healthcare bonds remain resilient. For example, bonds issued by Swiss pharmaceutical manufacturer Novartis International maturing in 2025 have been relatively flat. □
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