When China sneezes, the world catches a cold.
This time the world literally did. Coronavirus has pulverized all annual financial forecasts. Credit rating agencies around the world are reducing their forecasts for countries, predicting negative GDP growth. Investment banking industry is preparing to battle the economic fallouts that stand to threaten the growth and eat into the corporate profits due to lockdowns, halted factories, quarantines, curtailed travel, and postponing of big events. In less than a month, it has led to a collapse in commercial activity, a drop in global oil demand, and contraction in demand.
With the plummeting stocks, investors are concerned about the financial vulnerabilities exposed by the crisis. Many large investment banking firms have been forced to halt the dividends. Most investment bankers are asking: How bad is it? And How bad is too bad to throw their institutions’ economic growth in a tailspin?
Nouriel Roubini, a renowned economist, says the present economic crisis is much severe than anything the world has ever seen before.
The economy and banking system are highly integrated. One supports other, and even more so in crisis like these. As economies open up, how long will it take to recover?
For how long?
The economists are divided on what the recovery will look like? Will it be a U, L, or rather a quick V shaped rebound? If the outbreak is short lived and government’s accommodative monetary and fiscal stimulus proves sufficient, V shaped recovery will follow, and if crisis lasts long and economy remain disrupted with crippled networks, the recovery will assume U or L form.
In any case, most behemoths in the investment banking industry prophesied that the exit path will not prove easy for businesses and investors trying to survive this pandemonium. Opening up businesses will threaten workforce’s safety and trigger legal implications. China’s example shows manufacturers can’t get their operations up and running without facilitating screening and tests.
Both investing industry and businesses will have to master new environment in the long run. The new normal will be concerted on health measures, digitally run operations and value on automation.
Assessing the damage
Investment banking industry will face major problems due to volatility woes. The increased vitality in the market will reduce issuance that will directly hurt the capital revenues and trading.
Banks will also be the safety net for many to provide cheap credit for small and medium businesses worst affected by the crisis. Governments and central banks will have to work in tandem with banking and financial system to help them save themselves as well as the health of the economy by saving businesses. Quick solutions and support measures are required.
The primary goal for banks as well as governments, WHO has directed, is to get the majority out of this extreme situation toward near to a normal (now whatever that normal may look like).
- The impact of coronavirus on investment banking industry, particularly M&A aspect will be significant in short-to-medium term. M&A deals are being delayed and canceled.
- There are fears of a global rescission that may follow the economic upheaval unleashed by coronavirus. As a result, many transactions have been put on hold – from venture capital firms to private equity and investment banks, are awaiting the worst of the downturn.
- The number of cross border deals has declined, given the travel bans and also declining trust between global economies, particularly the US and China.
- On the funding side, the quantum of resources available are scathed. Private investors are indulged in crisis management. They are managing their existing portfolios before they consider new investments.
Silver lining: Future Opportunities
Every crisis is also an opportunity. Some of the best companies of the world and those in the investment banking industry reached heights in economic extremities. As governments around the world are doing their bits, there are certain aspects that investment bankers can focus on.
Market volatility for one part can sometimes drive revenues. Fitch rating agency quipped that current situation of the market is similar to 2018 fourth quarter selloffs, and 2016 first quarter, back when transactions went down and investors changed their priorities.
The snowball effect triggered by coronavirus is not unique to one country. Banking systems around the globe are hanging in balance. It’s important now for investment banks to make the right decisions quickly and keep their businesses running, as well as ensure economic existence of their clients, whether it be through M&A, or infusing more capital.