The COVID Macro View
In last week’s newsletter, we took a step back from the stats and took a macro view of COVID. We looked at: the five levels of change; timeframes; and decision-making principles.
The Five Levels of Change
What began as a clumsily concealed virus in China, now has five critical global dimensions:
At its heart COVID is a global health problem, which appears on track to become a global health calamity, particularly in parts of the developing world
In seeking to manage the health risks, a series of new social practices (increasingly codified as laws) have been introduced around the world. Those practices – which we now live with every day – change the way we live, work, socialise, relax and conduct our daily lives.
These changing social practices, in turn, have economic impacts. They affect what we buy (or perhaps, more importantly, don’t buy) and how, where and when we do it. They also affect what we can produce (goods and services), how quickly we can produce them, the cost of production and when we are paid. These changes have immediate and direct financial impacts on our businesses, our jobs and our livelihoods – think of the drop in trade at your local coffee shop, even before it was ordered to close.
These economic changes in turn drive changes in the demand and supply of capital, both debt and equity. This affects the amount of capital available for business and personal use, its cost and its terms. In extreme cases, these impacts can cause a collapse in some capital markets (as we saw in the GFC) which can feedback into, and compound, existing economic challenges. This remains a risk with COVID.
Finally, all of these factors feed into changes in our institutions: social, public and private. The role of Governments around the world is expanding enormously, at least for the foreseeable future. The economic models of seemingly impregnable social institutions (think the AFL, NRL and our Universities) now seem extremely vulnerable. And our financial institutions, which only a year ago were the pariahs of our corporate world, are now lauded as respected institutions putting the interests of the country and our broader community ahead of their shareholders.
These changes are deep, and in many cases, will last long past the cure of COVID. Each of our coming fortnightly newsletters will focus on one of these levels of change with our own and independent expert analysis.
How long will this last?
For this series, we are focusing our analysis on Australia. Even for Australia, whilst there are some encouraging early signs of tapering in infection rates, no one knows how long this will last. Whether or not we know is to some degree irrelevant. We must have a view on it, as without that view we cannot make the decisions which are required.
For our part, we are looking at these changes over the short (Q4/FY2020), medium (1H/FY2021) and long (2H/FY2021 and beyond) terms. We have formed a view on the expected impact on our business and modelled that impact across several different scenarios over each of these periods. And we have recalibrated our business accordingly.
Amidst such volatility, we don’t think it is the time for dogmatic rules – but it is very dangerous for a business to have no framework for making decisions. We set our framework in mid-March. Every decision we make during this period must be made in accordance with three principles: Be Safe, Be True and Be Positive:
- Our team and their families must be kept safe
- We must stay true to our core. This means knowing what we do (complex transactions, disputes and advice) – and importantly what we don’t do. Now is not the time to take chances redesigning the business model.
- Remain cashflow positive. None of us know how long this will last. Until the volatility ceases and we have confidence in our operating environment, we must remain cash flow positive every month. If we don’t do this, we risk the long term livelihoods of our team together with our ability to continue to create opportunities for our clients, our team and our community.
As we stated in last week’s newsletter over the next 10 weeks our fortnightly newsletter will analyse each of the five levels of change we are living through. Each newsletter will include our house view, together with the view of external experts in the respective fields. In our first newsletter of the series to be published on Friday 24 April, we are pleased to welcome Chris McGowan, CEO of SA Health as our guest contributor. Chris and his team have been global leaders in COVID-19 testing, isolation and tracking; drastically reducing the impact that COVID-19 may otherwise have on our healthcare system.