May 26, 2020 | Risk Management
Navigating Market Uncertainty: The Coronavirus and Your Business
Since the first case of the Coronavirus was announced, world markets have been rocked with chaos, causing losses not seen since the Financial Crisis over a decade ago.Multiple aspects of business operations have been affected, including global supply chain management, international travel and consumer sales. Investors and owners alike may be concerned as the number of global cases continues to rise and false information spreads on social media platforms, influencing customer behaviour.
First reported in Wuhan, China, COVID-19 began spreading around the world with confirmed cases in over 150 countries. Several organisations have suspended operations, banned international travel or delayed launches due to the pandemic. Forecasts for many companies are also grim. Between rate cuts, movement of major benchmarks like the Dow and fluctuating stocks, markets are experiencing a period of uncertainty – to say the least.
Risk to UK & European businesses
The earliest risks to businesses were with regards to supply chain management. Many source materials are from China and virus-related shutdowns have already prevented the production or release of everything from cars to tech products to wedding dresses. Though many operations are slowly restarting across China, regular processes and shipping will be slow to resume back to normal levels. At the same time, the threat of further spread is causing disruptions to regular routines such as halts to travel and large-scale events, not to mention school and office closures. Consumer spending is being affected in a wide variety of industries.
What actions are being taken to address the economic impact?
Central banks across the globe were quick to cut interest rates in hopes of stimulating local economies including cuts by the US Federal Reserve and Bank of England. Many are also eyeing stimulus packages and other measures in a bid to curb losses and quell fears like the UK’s £30 billion infusion. Yet questions remain about the effectiveness of such moves, since interest rates are already at near-record lows in many cases. In addition to this, numerous regions are limiting regular activity by cancelling schools and large-scale events, which makes normal public actions more difficult.
Are companies moving away from China-based operations?
By February, several companies had already decided to close offices or retail locations across China. Some are predicting that the virus could be the end of the country’s dominance over the global manufacturing sector, but such projections are likely premature. After all, talks of reducing Chinese-based sourcing have been ongoing for the past several years due to the US-China trade war and rising production prices. Minimum wages grew 64% in the past six years, significantly above those in neighbouring Sri Lanka and Vietnam.
Still, newer locations lack the population size and industry scale of China, meaning the chance of a labour shortage, assembly disruption or less-beneficial tax rates is a distinct possibility. In fact, in some cases it’s near-impossible to manufacture a product start-to-finish without Chinese involvement.
Overall, businesses should thoroughly explore the benefits and costs of any move before making a decision.
Comparisons with past global health crises
From Zika to H1N1 to SARS, the world has experienced the human and economic cost of several significant health epidemics over the past few decades. During the last week of February, the S&P 500 Index declined 8.9%, rattling investors. However, following the end of the bird flu epidemic in 2006 and SARS in 2003, the S&P 500 exceeded its previous highs within two months. Still, it’s impossible to predict future index movement and China’s economy is much bigger now, accounting for one fifth of global growth.
At the moment, markets are still reacting to panic and uncertainty over the increasing cases of the coronavirus. It’s difficult to predict future economic ramifications with complete certainty. Companies should remain vigilant and plan for an extended period of insecurity.
Could this happen again?
In reality, a wide variety of health epidemics and geopolitical issues could have an affect on financial markets. This is particularly challenging as these events are both near-impossible to predict and difficult to quantify. In the past few decades world incidents like the Arab Spring and US Embassy bombing in Africa have caused declines in the S&P 500. Business owners should operate with an understanding that markets can be volatile and those responsible for budgeting should prepare for multiple scenarios.
Key questions for companies to consider
Businesses with an international component are likely already affected by this outbreak. Whether their overseas imports are delayed, or foreign exchange payments are fluctuating, there is need for immediate action to avoid serious financial ramifications.
- Cash flow: A healthy cash flow is necessary for maintaining steady business operations, especially during a slow period or downturn. If your bottom line is negatively affected by current market conditions, it’s imperative you calculate the amount of time you can operate normally without adjustment.
- Risk tolerance: It’s unclear when markets will begin to steady. Until that point, CFOs and other financial leaders must determine their level of comfort with uncertainty.
- Supply chain: A number of companies source products and materials from China or other locations experiencing factory shutdowns and delays. Evaluate your sustainability and see if operations can wait until production re-starts at pre-virus levels or if you need to consider an alternate source.
- How to manage financial loss: According to our 2020 FX Barometer Report 23% of UK companies surveyed either absorbed extra costs or passed it onto customers, when faced with an unexpected expense due to currency fluctuation. Such practices are neither competitive nor sustainable, especially in today’s climate.
- FX risk management: There are a variety of currency strategies available to address both short-term and long-term concerns. To discuss your specific challenges, contact one of our specialists and to receive daily market updates directly to your inbox, sign up for our newsletter.