AVIVA INVESTORS – What makes a company resilient in a crisis?
As the COVID-19 pandemic hits global economies, equity investors are redoubling their focus on corporate resilience. But what does resilience mean in the current context – and which companies have it?
The coronavirus pandemic has roiled markets and disrupted business models around the world. One consequence of the crisis has been a renewed focus on what makes a company resilient: from the size of its debts to the consistency of its revenue streams.
But resilience is not a static quality. What it means to be resilient will shift under different market conditions, argues Mikhail Zverev, head of global equities at Aviva Investors.
“You need to ask the question: ‘resilient to what?’,” he says. “Like ‘quality’, ‘resilience’ may sound like an absolute concept, but it depends on context. Whether the risk is a theoretical black swan or a clear and present danger, equity investors need to look at a company’s capacity to respond and adapt to change.”
Winners and losers
In the current environment, a firm’s resilience will depend on the interplay between the fundamentals of the business and the fast-changing dynamics of economic activity and consumer behaviour amid severe coronavirus-related disruption.
Clear winners and losers have emerged in the early stages of the crisis. With global tourism effectively grinding to halt, the travel and leisure sector – airlines, hotels, casinos, cruise liners, and events – has been severely impacted. By contrast, software companies have benefited from the rise in demand for streaming and networking platforms during lockdowns.
Investors should have been able to spot underlying vulnerabilities in the worst-hit sectors
While investors cannot have been expected to predict the onset of the pandemic, they should have been able to spot underlying vulnerabilities in the worst-hit sectors. Travel and leisure was already far from resilient: in mid-2019, a KPMG report found almost 12 per cent of UK companies in this sector could be categorised as “zombie” firms, with static or falling turnover, low profitability, squeezed margins, limited cash reserves and high leverage. Faced with such pressures, these weaker firms had little capacity to invest in the new products or equipment that might have enabled them to adapt to a changed market environment.1
Similarly, independent US oil producers were fragile before the recent collapse in energy prices. Many companies were already highly leveraged and dependent on high oil prices to function; it would not have taken a crisis on the scale of COVID-19 to tip them into trouble.