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A changed world

How coronavirus could permanently change the way we live, work and invest
A changed world

“See you when I see you” I said cheerily to a colleague as I left the office for the last time on Thursday 12 March. Then, I expected perhaps a couple of days of working from home while the panic blew over. I didn’t genuinely believe that I would be facing several months of working from my kitchen table, furiously fighting the urge to binge (food and Netflix) and desperately trying to scrape together a semblance of routine.

But – aside from the fact that I am missing my colleagues and we are all very worried about the state we will find our favourite lunch spots in when we finally get back to the office – working from home has proved a better experience than expected.

The Investors Chronicle (and Financial Times as a whole) is using a mixture of the services provided by Slack (US:WORK) and Alphabet (US:GOOGL) to communicate. Every morning we open a shared Google document to discuss the news. We are using Google hangouts to chat as a group – and getting a fascinating insight into everyone’s homes and chosen leisurewear at the same time.

If anything, communication has improved. Perhaps it is the fact that the awkwardness of crossing the office to talk to someone hidden behind their computer has been removed, or maybe we are simply trying to relieve the boredom of isolation, but the upshot seems to be more sharing of ideas as a team (albeit digitally). The distance between our colleagues overseas or those who regularly work remotely doesn’t feel quite so far when no one is in the office.

The biggest hurdles in the remote productionof a magazine lie in the sourcing of economic data and checking pages before they go to the printers. The Bloomberg terminal that we use for timely financial data doesn’t easily permit remote access (unsurprisingly, it’s a £20,000 product and the company needs to protect it) and Slack doesn’t allow for annotation of scanned documents. The printing presses also need people to man them and we need drivers for distribution.

But we have put out a magazine and podcast without a member of the IC team having to step foot in the office for over two weeks and will continue to do so for as long as possible during this whole sorry saga.

The IC is not the only company to have recently discovered that working from home is easier than expected. With around a fifth of the world’s population currently in government-mandated lockdown, including some of the busiest cities, many millions of people are staying away from their offices.

This has been reflected in a big increase in demand for remote working tools. Microsoft (US:MSFT) reported that daily active users on its Teams instant messaging service had surged to 44m, with 12m new accounts added in one week. Slack, Zoom (US:ZM) and Google are also experiencing higher usage as businesses, schools and universities connect digitally. Demand for cybersecurity products and training has also spiked as experts expose phishing attacks by cybercriminals preying on people’s panic.



Remote working is not a new concept. Improvements in telecoms networks and computer software, alongside calls for better workplace flexibility, means the number of homeworkers has increased by 27 per cent in the UK in the past decade. But, last May, the Trades Union Congress said the move to flexi-working had been too slow, with not enough employers giving their staff the option to work remotely on a frequent basis. Coronavirus might have changed that. The last few weeks have proved that major organisations can operate successfully without a physical presence in the office or the need for excessive domestic and overseas travel. With the practicalities of home-working now better understood, the trend is likely to continue once the danger of a deadly virus has passed.




But there are big industries that cannot function remotely. Retail, hospitality and manufacturing require a physical presence, as do emergency workers, utility providers and travel operators. For now, while isolation measures keep all but key workers confined to their homes, there is little these organisations can do but shut up shop and wait for the storm to pass.

But, for many of them, their place of work might change permanently as a result of the shift to more flexi-working. There will be less demand for train, bus and taxi drivers if we are not commuting as often. Offices won’t need as many desks, meeting rooms or support staff. Pubs, restaurants and cafes that rely on the trade of lunchtime punters in busy cities might see custom decline if people are working remotely more often. Many of the job cuts in these businesses – for now a temporary measure to preserve cash – are likely to become more permanent.

And it is not just working life that has evolved almost beyond recognition as we take shelter from coronavirus. Even before the enforced closure of pubs, restaurants and bars in the UK, many Brits were staying away from crowded spaces for fear of infection. Cinemas, theme parks and shops have all closed their doors to protect staff and customers. Gyms and pools are empty, while demand for home workout equipment has risen so high that Mike Ashley attempted to claim Sports Direct (SPD) employees were key workers, delivering vital workout equipment in the UK.


Students at both school and university are finding ways to keep themselves active thanks partly to Joe Wicks’ online PE lessons. Tech is keeping teachers connected to their students across all subjects, but the challenges of disciplining a virtual class suggests schools will probably return to normal as soon as possible. Higher education might be a different matter. Students graduating this summer will have earned their degrees with very little face-to-face contact with lecturers, further undermining the justification for expensive tuition fees. Higher education is a sector ripe for disruption – perhaps some of the big tech companies that have provided learning tools during the period of lockdown will continue to shake up the market.



To entertain ourselves from the safety of our homes, we are turning to the virtual world: streaming, gaming and FaceTiming are filling the time that was once occupied by trips to cinemas, bowling alleys and pubs. Online grocery shopping has become so popular that Ocado (OCDO) had to pause new orders for a few days to deal with the huge demand. Consumers are turning to e-commerce more than ever – at least until a lack of personal protection equipment and mounting health fears force warehouses and fulfilment centres to send their staff home. The demand has even put pressure on Amazon’s (US:AMZN) famous logistics – next-day deliveries are a rare and precious gift for Prime members during coronavirus lockdown.


Unsurprisingly, high streets are eerily quiet – the shuttered shops providing a frightening glimpse into the potential future of town centres. When John Lewis shut its flagship store on Oxford Street earlier in March, images circulated on Twitter depicting the burned-out shell of the building after it was bombed in World War II alongside the caption: ‘If we survived the war, we can survive coronavirus.’ But in the 1940s John Lewis wasn’t facing the additional pressure of an increasingly digital world. The high street’s demise has been anticipated for many years as demand for e-commerce has rocketed. Coronavirus may be the catalyst that kills off high streets for good.

It is tough to say with any certainty that our coronavirus-enforced behaviour is set to become the new normal. For now, all companies can do is hunker down and await the end of the storm. However, one trend that should emerge from the current crisis is the need for better financial management. Companies that have relied on cheap debt to satisfy shareholders’ growth ambitions now find themselves at the mercy of expensive government bailouts – that is no way to run a business.

Well-managed companies, which are not over-leveraged and have truly strong balance sheets, should be best placed to emerge from the crisis unscathed. But bigger challenges might face certain sectors if the world that awaits them on the other side of coronavirus is indeed different to the one they left behind.


Property: a multi-sector shift

Rent is a fixed cost for most businesses. But what if, in the wake of the coronavirus lockdown, some employers realise that they are able to cope without so much office space? For the UK’s large office landlords – Derwent London (DLN), Helical (HLCL), Great Portland (GPOR) and CLS (CLS) – a reduction in demand for floor space could spark a decline in net rental income, which would lower the investment yields attached to their assets.  

The potential fallout could be made worse by the fact that many of these landlords have been increasingly leasing space to flexible workspace groups, such as IWG (IWG) and WeWork. Demand for these could drop if staff can work from the comfort of their homes. Admittedly, a reduction in demand would not be immediately apparent, given leases are typically signed on a long-term basis of several years. For example, Derwent’s lease with The Office Group was signed in 2015 for a term of 20 years. But, beyond that, the future suddenly looks a lot less certain than it did only a few weeks ago.



Prior to the outbreak of Covid-19, the UK’s office market was in a robust position. The ever-expanding skyline of the City of London stands testament to the increased investment in the sector in recent years. In March, the average investment yield stood at 4 per cent for prime offices in the capital, according to data from Knight Frank. However, the sector may already have been primed for a correction. During the first half of last year, 11 per cent of rent generated by the UK’s offices was greater than the open-market value. That is higher than the retail and industrial sectors and suggests the market was already at risk of over-renting.

In the retail property market, unnerving trends – rising e-commerce and lower high-street footfall – have been worryingly accelerated by the coronavirus. In the wake of widespread closures of hospitality venues and shops, the government has said that tenants will be protected from eviction if they miss rent payments for the next three months. While that eases immediate pressure on the retailers, the burden falls on commercial landlords.

That burden could get even more pressing if retailers and restaurants begin to go out of business, thus leaving even more high-street premises vacant. Filling empty properties isn’t going to be easy as we emerge from coronavirus, and the market they served has moved on – or stays at home. EP


Banks: a reset or continued decline?

Forecasting the impact of the coronavirus on the banking system is not an easy task.

For a start, no one knows how long the economy will remain on ice, which means it is impossible to say when banks might profitably lend again. Second, until countries start to get a handle on the pandemic, there remains a serious risk that the profound shocks to economic activity, capital markets, businesses and households could spill over into liquidity issues within the financial system. According to one recent survey,  up to a fifth of the UK’s 5m small firms could run out of cash in the next four weeks, despite government schemes.

The market in which this crisis started may have sold live animals rather than toxic derivatives, but the scale of the current predicament still has the capacity to overwhelm the balance sheets of major lenders, just as the banking crisis did in 2008. And if there’s one lesson from the last major market crash, it is that distress in just one financial institution can result in wide and unpredictable domino effects.

There are some things we can say with greater certainty: in the immediate term, the coronavirus means colossal operational disruption. Investment plans have been suspended and products have been pulled as the demand for customer support has soared. Last week, faced with the disruption of a quarantined workforce, HSBC (HSBA) hit pause on its attempts to conduct what chief executive Noel Quinn described as one of the “deepest restructuring programmes” in the bank’s history.

It also means this year’s financial statements are going to be very ugly. OneSavings Bank (OSB), the largest listed domestic lender to report since the Covid-19 crisis took hold in the UK, said the pandemic could adversely impact the asset quality of its loans, lending volumes, funding sources, service quality and operational capacity. Candidly, OSB also flagged the “increased propensity for human error owing to a reduced and stretched workforce” – which is always a concern within complex systems such as finance.

Elsewhere, the current crisis looks set to hasten other pre-existing trends. As millions of customers adapt to life without the high street, the expensive branch-based service model pursued by Metro Bank (MTRO) looks even more redundant. The greatest working from home experiment in history will also embolden the efforts of bank chief technology officers to digitise.

Could an accelerated shift to leaner processes prove to be one silver lining? After all, the need to cut costs has long been seen by many analysts as the only real opportunity for UK banking to improve its profitability.

Set in the broader market context, it seems doubtful. Between the income-eroding impact of near-zero interest rates, and the quasi-governmental role banks are rightly being asked to play amid the current turmoil, it’s hard to see what should attract equity investors to UK lenders for some time – especially now that banks have bowed to regulatory pressure and scrapped their dividends. AN


A catalyst for fintech?

Elsewhere in the finance industry, coronavirus might fast-track a burgeoning trend. This year had been earmarked as the year for an acceleration in the use of financial technology before the coronavirus sparked a decline in cash circulation, a surge in online shopping and a rise in contactless payments. 

Now, even more people have been willing to embrace digital payments as they try to side-step potentially-contaminated surfaces. Cash payments have halved as consumers stay away from shops and on 1 April the limit for contactless payments in the UK was raised from £30 to £45 to help people avoid pin pads. These trends are unlikely to reverse once the threat of coronavirus lifts.

Meanwhile, digital purchases of goods and services has spiked. In its recent financial results, UK group Boku (BOKU), which provides software that facilitates online payments for merchants, said that it had seen increases in new users of its payments platform this year, especially for streaming video services and gaming in countries that have been hit hardest by the virus. 

For now, Visa (US:V) and Mastercard (US:MA), the titans in the sector, are struggling with an overall decline in spending. The medium-term outlook for both companies has been disrupted by a decline in cross-border payments – a key driver of profits. It is the same tale on our own shores: Network International (NETW) said it had seen a reduction in client transaction volumes in recent weeks. Finablr (FIN) struck a similarly sombre tone in an update earlier this month, flagging that its cash flow and liquidity were under threat from travel restrictions, which have hurt foreign exchange and payment services – its auditor has now resigned. 

But the outlook for these groups isn’t nearly as terrifying as it is for cash-based companies. De La Rue (DLAR) had been struggling before the massive decline in cash payments sparked by the outbreak of coronavirus. The outlook for its currency business (77 per cent of 2019 revenues) is now bleaker than ever. LA


Is coronavirus a stopper or an accelerant on the green revolution? 

One of the more welcome images from the coronavirus pandemic is the immediate relief on the natural environment. While we are confined to our homes, unable to travel for business or pleasure, the waters of Venice’s polluted canals have run clear and skies are empty of vapour trails. Coronavirus is a timely reminder that we must do more to protect our environment.

So, will coronavirus curb our appetite for travel? A departure from flying to our holiday destinations seems unlikely. By the time we are freed from lockdown, many of us will have accumulated significant annual leave and enough savings to fund an extravagant trip. InterContinental Hotels (IHG) has already experienced improvements in room occupancy levels in China, where the pandemic appears to be receding. For now, uncertainty over the future of holidaying hangs on the survival of suppliers, not the revival of its demand.

However, business travel is another matter. While UK residents’ demand for international tourism rose for the best part of the last decade, they made about 1.4m fewer business trips abroad in 2018 compared with 1998, according to the Office for National Statistics. Technology has already lessened the need to fly to meetings. In 1998, Concorde took us from London to New York in around three hours; Microsoft can take us there in seconds. Reducing business travel might be the most attractive way of reducing our carbon footprint in a post-coronavirus world. AJ


Sustainability could suffer

But then there’s the oil price crash, which makes green initiatives – including reduced flying and a rise in electric vehicles – seem less attractive. Cheaper oil could also see investors and fossil fuel companies forget their previous plans to cut emissions. The International Energy Agency (IEA) has pleaded with governments to keep climate in mind in financial stimulus packages, but the short-term impacts on new renewable projects will be rough. 

Wood Mackenzie analyst Valentina Kretzschmar said plans made at $60 (£51) a barrel would not necessarily stick at $30 a barrel. “The sector will struggle to generate enough cash to maintain operations and honour shareholder commitments,” she said. 

The short-term outlook for renewables spending is not attractive. WoodMac has forecast a 6 per cent drop in wind additions so far this year, with more possibly to come as factories in Europe close. The upcoming auctions and tenders in Europe, South Africa and China could all be postponed, cutting into added capacity in the coming years. In the short term, cheaper oil makes cutting emissions tougher. “Without measures by governments, cheaper energy always leads consumers to use it less efficiently,” according to IEA executive director Fatih Birol. “It reduces the appeal of buying more efficient cars or retrofitting homes and offices to save energy.” 

The oil oversupply – caused by both a drop in demand from Covid-19 mitigation measures and Saudi Arabia pumping up supply over a disagreement with Russia – will have upsides for renewable energy investment however, according to Dr Kretzschmar. Using a medium-term price of $35 a barrel, she said the returns on pre-green-light oil projects fall and make investment in renewable projects look like a safer bet. “With a weighted average return of 6 per cent IRR [internal rate of return], oil and gas projects are now in line with average returns from low-risk solar and wind projects,” she said. AH


A caveat

This article has been written after two weeks of isolation and the novelty of home-working is now starting to wear thin. True, the longer the lockdown goes on the greater the damage inflicted on the global economy; but, also, the more desperate we will be to return to our old habits. The way we used to live may become normal again and coronavirus could eventually become a distant blip in the global landscape with no lasting repercussions. But somehow, we doubt it.