Colin McLean, managing director, SVM Asset Management has commented on the issue:
- Legacy debt, new business models and a changed social agenda will leave some sectors unrecognisable.
- Expect greater use of tax and legislation to encourage effective business structures
- Even lower inflation and interest rates are now likely
“Global recession will give way to a pick-up in activity, but some sectors may left unrecognisable, grappling with legacy debt, new business models and a changed social agenda. Big companies bailed-out today may be called to account politically for their failure to build-in sustainability and resilience.
“National resilience will demand bigger roles for health, contingency planning and other preparedness but also greater use of tax and legislation to encourage effective business structures. UK corporate governance has simply not been fit for purpose. Excessive dividends, share buy-backs, and unreasonable executive rewards have led to over-borrowed businesses with no buffers for bad times.
“Stock markets will help with refinancing distressed listed companies, and banks will feed finance to badly-hit small and medium sized businesses in the broader economy. The job of incentivising sustainable business structures is a political one; there will soon be opportunity to make change.
“Heavily borrowed company structures – much loved by private equity – should be the first to go. High debt creates a one-way option; great if the economy goes well, disastrous in a downturn. Restaurant chain Carluccio’s and many high street retail chains are testimony to this.
“Urgently needed, too, is an acceleration in the pace at which companies implement environmental, socialand governance issues. Investors must take to task boards that incentivise bad behaviour and companies that have behaved badly during the crisis. Some businesses have been much too quick to dump employees onto state support, when other adjustments might have been made.
“Companies structured to pay little tax will be an area of investment risk. Tax havens can be a virtual home for cruise companies, tech businesses and private equity, but don’t have the resource for bail-outs. Should other governments step in? Employment may be at risk, but with little in tax receipts to pay for that. A re-set of tax on a global basis seems likely.
“Despite all the money being pumped into economies by governments around the world, even lower inflation and interest rates are now likely. This disinflation trend has been in place for more than a decade, but the loss of wealth will cut consumer confidence until that capital safety-net is rebuilt. Unemployment will constrain wage growth despite a move to shorter supply chains. Low inflation and dividend cuts have a big impact on pension fund liabilities and the balance sheets of many big companies.
“Credit is stressed much as it was after the financial crisis and many smaller and medium sized companies will suffer higher borrowing costs. Junk bonds – low quality borrowing – are once again a problem, however this time central banks may hesitate to bail out questionable financial structures. Much of the distressed borrowing relates to energy, hit by the oil price collapse.
“Understandably politicians are currently focused on the crisis, but this experience should drive fresh thinking on the economy of the future.”
For more information visit: www.svmonline.co.uk
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