Authored by Garfield Reynolds via Bloomberg,
The sheer speed of the coronavirus crisis means investors are way behind the curve in assessing its long-term impact on economies, companies and stock market valuations.
The global business environment is being transformed - we are all socialists now.
This is about more than just the failure of earnings estimates to keep up with the virus impact - investors need to disregard projections that an end to the crisis will restore the pre-outbreak status quo.
Decades of pushing government out of business are being reversed in mere weeks, with policy makers telling companies where, how and if they should operate - whether they can pay dividends, buy back stock or fire employees.
In other words, governments are almost fully taking over free markets, with the profit principle dethroned as the key business driver.
This changes the rules of the game for investors.
Look at crude oil for example, where U.S. companies that were on the way to going bust amid last year’s supply and demand shocks could end up surviving as Washington intervenes to prop up all businesses.
Once governments start deciding wholesale which firms live or die, how do you roll that back?
The same goes for the massive ramp up in what has been derided at times as the “nanny state.” Welfare and increased spending on health care will likely become a larger part of most economies.
The massive public borrowing to fund this - and the surge in stimulus programs - will take years to go away. The world is going to be awash with debt that will limit governments’ room for maneuver on things like infrastructure spending and tax cuts.
Companies are also busy taking on more debt, and that will constrain them going forward - funneling profits to paying it back or rebuilding cash reserves rather than dividends, buybacks or, heaven forbid, expansion.
The recognition of the role lower-paid workers are playing in keeping supply chains, supermarkets, delivery systems etc. running will likely fuel a renewed call for increases to minimum wages, further pressuring margins.
And calls to keep production closer to “home” will lead to an overhaul of supply chains that won’t come without cost.
Companies will likely emerge from this downturn with a permanent hit to their long-term potential margins - one that is not yet reflected in analyst valuations.
Any investor who assumes that the business models of December 2019 will work just fine in December 2020 faces a very rude awakening.