We can now say that the Coronavirus global pandemic has forever changed the way governments run countries, companies do business, and citizens live their lives. It’s an unprecedented crisis that has significantly slowed down – if not shut down – many of the world’s economies. In its wake, it has also impacted one of the oldest, biggest, and seemingly most stable industries in the world: investment banking.
What is Investment Banking?
It refers to the business of helping large companies raise funds for specific purposes, including but not limited to:
• Business expansion;
• Construction of new factories;
• Debt retirement; and
• Meeting capital requirements set by the government.
Referred to as investment banks or investment bankers, they raise funds for big businesses in several ways:
• Underwriting new debt and equity securities;
• Helping other underwriting firms in marketing new securities to the public;
• Managing mergers and acquisitions; and
• Guiding companies who want to raise new capital via initial public offerings (IPOs) or secondary public offerings.
Global Recession Curveball
Before we go directly into how the coronavirus pandemic will impact the global investment banking industry, we need to talk about the global economy first.
Many countries, even the world’s richest ones like the United States and Singapore, rely heavily on international trade. Either they don’t have enough natural resources to produce basic necessities (Singapore) or because of the desire for optimal profitability, they choose to import a lot of their products and services (United States).
The rapid spread of the coronavirus all over the world compelled many countries to implement partial and complete lockdowns or quarantines. Among other things, this means:
• Their citizens’ movements are severely restricted, e.g., they are forced to stay home and can only go out of the house because of necessities;
• Countries are severely limiting, if not suspending, foreign travel into their jurisdictions to minimize the risk of further escalation of their coronavirus situations;
• Save for the most important ones, businesses are required to stay closed for an open-ended period while their cities and countries are under quarantines or lockdowns;
• Since most businesses are closed, millions of people can’t earn a living; and
• Many economies all over the world, including the biggest ones like the United States, will most likely experience severe recessions.
This also means trouble for import-dependent countries like Singapore. The longer the pandemic persists, the higher the likelihood that exporting countries will stop exports of important goods to prioritize their own citizens’ needs. Think of it this way: even the most generous person will stop being generous to others when there’s a severe shortage of food because he or she will prioritize his/her family’s needs first. It’s basic human instinct: survival of the fittest.
A Global Recession Puts Everything on Hold
Why do large corporations want to raise more capital? They need more funds to invest so they can earn more money. While there is no such thing as a risk-free investment, sustained economic growth provides an environment where financial risk is minimized.
Consider this: if a country’s annual GDP has been growing at an average rate of 3%, it means businesses and people, in general, are earning a higher income. With increasing income comes the ability to purchase more things aside from basic needs. And this ability to purchase more stuff gives companies the opportunity to invest in higher production capacity to sell more and earn more.
Let’s view economic growth from the perspective of a fast-food restaurant business. When the economy continues to grow, more people start earning money or earn more money. This means there are more prospective customers who want and can afford to eat out. Raising more capital to put up more branches all over the country makes sense and will most likely be a successful investment, especially if the chain is a popular one.
Now, what if there’s a recession, like what most economists expect because of the global coronavirus pandemic? A recession means the economy, whether global or national, contracted. A recession indicates a decrease in the value of transactions or business conducted. People and businesses are spending and earning less.
Let’s go back to our fast-food restaurant business. From the perspective of its owners, it means people have cut down on eating out, probably because of less disposable income. It means restaurants, in general, are not able to maximize their current capacities. In this case, why would it consider investing more money to increase current capacity?
The Coronavirus’ Potential Impact on Global Investment Banking
With many of the world’s biggest financial markets registering huge declines in the last few weeks, many companies who plan to raise additional capital via IPOs or secondary public offerings will most likely postpone or ditch their plans altogether.
How do severe market downturns affect investment banks? Remember, their main business involves helping large corporations raise huge amounts of money for business expansion or capital restructuring. Severe market downturns can keep them from achieving their fund-raising goals in several ways.
First, when financial markets are down, it affects the offering prices of securities large corporations plan to issue. Take, for example, a stock IPO. During bull markets, it’s easy to achieve fund-raising targets because investors are highly optimistic that they’re willing to pay a huge premium for the newly listed stocks.
If the par value of a stock being offered in an IPO is $20 per share, investment bankers can easily sell those new stocks at a high premium, say $25 to $30 because investor sentiment is so positive during bull markets that they don’t mind buying financial assets at a high premium.
But during a bear market, which is what most markets are in right now following the global spread of the coronavirus, even the best-rated financial securities will not be attractive enough for most investors to take risks. As such, new security issuances can’t be priced higher and are deferred until market conditions greatly improve.
But here’s the catch, it might take a while for the global economy and major financial markets to recover. Considering how this global pandemic shuts down borders, constricts international trade and compels most businesses to stay closed, the expected financial losses for most businesses and professionals can be huge. Unlike with natural calamities like storms or earthquakes that suspend business activities for days only, the coronavirus pandemic can close most businesses for weeks or even months. Recovering the huge losses from being shut down this long will most likely be a long and arduous road for most businesses. Hence, financial markets may take a long while to recover.
But more than just the prices of publicly offered securities that affect companies’ abilities to accomplish their funding goals, a possible global recession resulting from the coronavirus problem will make it unwise to push through with fundraising plans. Why?
The single biggest reason is low or negative returns on investment, first for investors who buy the newly issued securities and then for the company itself. It does not make sense to buy stocks or bonds during an IPO or secondary public offering during bear markets. More likely than not, the market prices of such securities will go down significantly after listing, resulting in serious losses for investors. It would make more sense to buy from the market at lower prices long after the IPO or secondary offering has been listed. This increases the likelihood of earning a positive return on investment.
As for the companies that plan to raise new funds via investment banking, they may also suffer from low or negative returns on investment. A global recession means that most economies around the world have contracted or shrunk. This means in general, businesses and professionals spent less money compared to previous years and quarters. Lower spending means less demand for products and services. Raising new funds to increase production or service capacity at a time when demand is shrinking will most likely result in lower net income or worse, net losses. Consequently, these will result in either a much lower return on equity investment or a negative one.
How Investment Banks Can Thrive During the Coronavirus Pandemic
The key to not only survival but success during the global pandemic is identifying the businesses that will most likely thrive during the pandemic. Here are some of the industries that will likely “benefit” from the pandemic.
Obviously, one of the industries that stand to benefit most from pandemics is the pharmaceutical industry. It’s because they play a crucial role in successfully curing and preventing coronavirus infections. As early as now, several Big Pharma companies are playing important roles during the pandemic:
• Gilead Sciences, the owners of a potential coronavirus cure called Remdesivir that is scheduled to begin clinical trials;
• Roche, which is one of the world’s biggest coronavirus testing kit manufacturers; and
• Fujifilm, makers of another potential coronavirus cure called Avigan, which is also scheduled to begin clinical trials.
One of the biggest business challenges brought about by the pandemic is country/community lockdowns or quarantines. This is when governments try to arrest the spread of the coronavirus by compelling their citizens to stay at home for extended periods of time, such as what is happening in Italy and in the main island of Luzon in the Philippines.
But as they say, every challenge is an opportunity. In this case, it’s an opportunity for e-commerce or online shopping platforms. People will continue to buy even under quarantine or lockdown because they need to. Online shopping businesses will benefit the most from this because people will be compelled to buy from online sellers because of limited mobility.
Case in point, Amazon.com announced on March 16th, 2020 that in response to the increased demand for online shopping due to the coronavirus situation, they plan to hire about 100,000 more workers. Some online selling business can’t even keep up with the increased demand, such as the online grocer Ocado. Until it clears its deliveries backlogs, its operations remain suspended.
Delivery & Logistics Companies
The expected surge in online shopping transactions during quarantines and lockdowns will require increased logistical capacities, too. Otherwise, how will online orders be fulfilled? That’s why another industry where investment banks can focus on is logistics.
Consider the following examples of companies that are benefiting from the coronavirus situation:
• Cainiao, which is the Alibaba Group’s logistics company, launched an initiative to meet the increased demand for delivery of medical supplies and protective personal equipment (PPE) for front liners working in Wuhan, the birthplace of the coronavirus;
• Deliveroo, a food delivery app based in the United Kingdom, which has started implementing no-contact food delivery services.
Because of lockdowns and quarantines in many countries badly affected by the pandemic, there have been sharp increases in the number of work-from-home employees. To stay in touch with colleagues and superiors, they have to use video conferencing apps like Zoom and Microsoft Teams, among others. And with increased demand for these paid services come higher revenues, too.
Such increases in revenue didn’t just help make video conference app companies earn higher net income. They helped boost their stock prices, too. For example, Zoom’s share price is up by about 50% in 2020 despite the pandemic. Or maybe it was because of the pandemic.
Streaming & Online Gaming Companies
Finally, being quarantined at home will make millions, if not billions of people really bored. They will need to be entertained if they’re to survive their countries’ respective lockdowns and quarantines with their sanity intact. That’s why another industry that will benefit most from the pandemic is streaming and online gaming companies like Netflix, Disney+ and Amazon Prime Video, which have all registered substantial subscriber base growth during the pandemic.
The coronavirus global pandemic is expected to cause a serious global recession. And because investment banks are dependent on bullish economies and financial markets, they’re expected to take significant hits on revenues and net income in 2020. However, there are a couple of industries that stand to greatly benefit from it. By focusing on businesses in such industries, investment banks all over the world can either minimize their losses or continue operating profitably, albeit not as much as before the pandemic broke out.