Coronavirus: Plan B – Hope for the best, prepare for the worst

In the latest Nordea On Your Mind report ‘Coronavirus: Plan B’, Johan Trocmé and Viktor Sonebäck explore the economic shock unlike any other. There are some winners from the pandemic, like online retail and healthcare, but others, such as travel, hospitality and oil, could see a permanent negative impact. Corporates should carefully consider what they are prepared for in a very uncertain outlook.

A shock without equal

The COVID-19 pandemic has hit the world economy harder and more abruptly than even the global financial crisis of 2008-09. Lockdowns to slow the spread of the virus kept consumers stuck in their homes and made Chinese GDP growth plunge to -7% in Q1, with the US and the EU facing -9% and -14%, respectively, in Q2. Net global GDP is now set to fall 3.5% in 2020. Listed Nordic large corporates saw 20% of their top line vanish in Q2, with EBITDA down 27% and net debt rising 9%. It would have been even worse without unprecedented state and central bank support, such as subsidised temporary staff layoffs, deferred tax payments and loan guarantees.

No quick fix for COVID-19

In the absence of an effective vaccine or universal therapy, governments arguably have no choice but to enforce social distancing to slow the spread of the virus and avoid overwhelming healthcare systems with too many patients requiring intensive care. Such measures have been eased in recent months, but could be reintroduced in response to any resurgence of the virus. We believe a vaccine will be approved for use in three to six months and that it will likely offer effective immunity for one to two years, which should be sufficient to effectively end the pandemic. But the ramp-up of vaccine production, distribution and actual vaccinations – until a large enough share of the global population is immune – will take time. The WHO expects it could take two years before the pandemic is declared over, while consumer and business confidence could start to improve earlier.

Markets expect a return to normal in 2021 – do you?

Remarkably, equity indices and credit spreads have recovered to pre-crisis levels despite dire macroeconomic news flow and corporate earnings momentum. Capital markets discount a 'V-shaped' recovery and consensus forecasts currently expect 2021 revenues for the STOXX Global 1800 that are back to 2019 levels. Massive central bank stimulus has undeniably buoyed capital markets, but we think corporates should have a long, hard think about what they dare to expect from the economy in 2021 and beyond. This holds especially true for those in industries facing potential permanent changes in consumer behaviour, eg travel, hospitality, entertainment, retail, and real estate. If there is a meaningful risk of anything other than the benign consensus scenario, having a financial 'Plan B' will be essential.

The thinking of the first movers: Interviews with Finnair and XXL

The air travel and retail industries were among those hardest hit by the COVID-19 pandemic, and they needed to evaluate the emerging crisis early on and take action. In this report, Airline Finnair's CEO Topi Manner and sporting goods retailer XXL's CFO Stein Eriksen share their thinking, the nature of their dialogue with key stakeholders, and key arguments behind their decisions to raise new equity and funding in Q2.