The companies hardest hit by Covid-19 fall, roughly, into four categories.
First are companies for whom social distancing presents an all-but-unsolvable problem because they need their customers to gather at close quarters. Airlines are the paradigmatic example. How long will it be until we are as comfortable flying on planes as we were, if we ever are? As of last week, travellers passing through security checkpoints at US airports were still down by almost 80 per cent from the year before, according to the Transportation Security Administration. And the recession caused by the virus could have a longer-lasting impact on the airline industry than the virus itself. In the great financial crisis, miles flown only returned to 2007 levels in late 2013. Boeing and Airbus are among the top losers of the year on concerns of an indefinite slump in demand for aircraft.
Alcohol is usually considered a defensive investment. But as it turns out, we drink a lot of beer in crowded bars and restaurants. In April, AB InBev sold almost a third less beer than the year before. Casinos and catering companies are also in this category, too. At the extreme, there is mall owner Simon Property, its shares cut in half this year.
Even mighty Disney, which produces so much of the entertainment we have been staring at during lockdown, took a direct hit. Perhaps a quarter of its revenue and an unknown amount of its brand equity is generated at theme parks where crowds are, or were, part of the fun.
Then there are the heavy industrials, which have suffered not only lower demand but a hit to supply, too. Production lines need to be adapted to keep workers safe, and some of these changes may have to be permanent. Manufacture is about efficiency. Fiddling with highly specialised processes is costly. In this basket we find everyone from carmakers to chemical groups. General Electric, already reeling from decades of bad investment decisions, has seen its shares fall another third this year.
Next come the energy companies, where too much supply is the problem. The Saudis turned on the oil spigots just as the pandemic was gaining momentum. Then demand collapsed. The International Energy Agency expects second-quarter oil demand to fall by almost a fifth in the second quarter, and the price of Brent crude is 40 per cent lower than it was in January, even after bouncing off its May lows.
Supermajors such as Shell and Saudi Aramco are hurting, but the pain is acute at the industry’s ragged financial edge, the US shale sector. The shale players have always been only marginally profitable and require heavy investment. Many have gone bankrupt and more will follow.
Finally, the banks, life insurers, and asset managers. Profits for all of these companies are sensitive to interest rates, which Covid-19 have sent plummeting. Central-bank policy and diminished growth expectations have driven the yield on the 10-year Treasury from 1.9 per cent to 0.7 per cent since the beginning of the year, and have planted short rates at zero. For the banks, the risk that the recession will lead to waves of loan default piles another worry on top of the yield collapse. Even well-capitalised stalwarts such as JPMorgan and Bank of America, which enjoy huge economies of scale, have lost a quarter of their value this year.
Note that, except for the first group, what the virus has done is accelerate existing trends. Heavy industry has been reckoning with stagnant spending on capital equipment for years; the oil industry has long been pummelled by falling demand for carbon-based fuel; and falling interest rates have been squeezing banks on and off since the great financial crisis (positive trends have gained momentum, too, from online retail to cloud computing).
A perfect exemplar of how the pandemic has made existing problems worse: Warren Buffett’s Berkshire Hathaway. It is not just that Berkshire’s portfolio is massively overweight financials, and has plenty of exposure to industrial and energy, too. The Federal Reserve’s aggressive use of its balance sheet has also drained the potency from Berkshire’s cash pile.
After the last crisis, Berkshire provided cash to struggling banks at high interest rates and with equity options attached. It made a bundle. This time around, given the Fed’s largesse, no one needs such expensive assistance, as Mr Buffett has ruefully acknowledged. As for acquisitions, the furious rally means Mr Buffett had little time to bargain hunt. The cash on Berkshire’s balance sheet, once a sail, is now an anchor.
At Berkshire and at countless other companies, decisions that were once possible to delay are now pressing. How many branches can banks afford to keep open? Is further investment in shale fields rational? Must the auto industry take action to reduce capacity? Does Berkshire Hathaway, in its current form, make financial sense? Covid-19 has dragged the future into the present.