by Ned Salter, Head of Equities – Global Research, Asia ex Japan
“The only certainty is uncertainty,” is a well-known idiom. This philosophy is especially relevant right now as the global spread of COVID-19 triggers unprecedented economic disruption and market volatility, pushing policymakers and businesses executives to experiment with alternative solutions.
As a result of the pandemic, ‘resilience’ is emerging as both a buzzword and desirable mindset. In essence, resilience is the ability of a company or country to withstand, react to and pivot from an exogenous shock, whether it is geopolitical, social, security or climate-related.
Fostering corporate resilience, in particular, is proving to be vital as the coronavirus poses fresh challenges to multiple sectors. Consider the wholesale shift to home offices, or soaring demand for telehealth services, or contactless grocery delivery options – many businesses have had to revamp their operating models in order to survive and thrive.
How can resilience ensure a company will confidently function through a downturn?
Are investors able to put a monetary value on resilience and stability?
These were some of the key themes explored by Fidelity International’s Head of Equities, Ned Salter, at the 2020 Asia Investment Conference, which focused on finding opportunities in a post-pandemic world.
Supporting long-term value
Although various issues – such as concerns about a trade war or interest rate expectations – can affect the price of a security in the short term, long-term value is derived from fundamentals and structural growth drivers that underpin an industry or company.
“Markets reward companies that deliver sustainable earnings through time,” said Salter. “Resilience matters for the earnings and the multiple that investors are willing to pay for a security.”
According to Fidelity International research, a firm’s resilience is dependent, to some degree, on the industry it is in. For instance, non-cyclical sectors like utilities and telecoms have been largely insulated from the COVID-19 crisis, whereas cyclical sectors like materials and energy are still in the process of recovering and remain vulnerable to further lockdown rules.
Nonetheless, genuine resilience should be assessed and measured at the company level, Salter noted. It requires a deep dive into organisational models and strategies. There are numerous factors to weigh up, including the feedback mechanism from frontline employees to senior management; technological expertise and online capabilities; and whether supply chains are local or global.
Transforming from within
Early signs suggest the pandemic is prompting businesses to transform from ‘just in time’ to ‘just in case’ – that is, embedding agility and preparedness into their corporate culture. Companies in the consumer discretionary, energy and industrials sectors are already leading the charge when it comes to making structural changes to cope with the health emergency.
In addition to reviewing operations, Salter also recommended shoring up balance sheets beyond raising capital. “This really helps businesses be resilient in times of crisis like this, where we couldn’t imagine such a supply shock, and companies are burning a significant amount of cash while people are in their homes unable to go out,” he said.
The current circumstances highlight the evolution of investment analysis and what factors are gaining in importance. For Salter, embracing sustainability criteria – environmental impact, social awareness and governance – as well as thinking about the 360-degree set of stakeholders – are essential to build resilience against negative externalities.
Companies that prioritise resilience can avoid ending up “walking a tightrope in precarious situations,” Salter said. And, ultimately, investors will benefit from identifying those that are making this transformation.