The crisis that we have been experiencing for almost one and half years now has no equivalent in modern history. It is neither a classic cyclical crisis, nor a replica of the great financial crisis of 2008. It would be dangerous to think, therefore, that we are coming out of it in the same way as previous crises.
What are we seeing? Two words enable us to deepen the analysis.
The first is “contrast”. This is, of course, not the first time that an economic crisis has affected some geographies more severely than others, particularly, in this case, Europe more than the Far East. However, it is the first time that we observe such diversity in the impact on different economic sectors. As a result, some affected sectors will take several years to return to their situation in 2019, like air transport or tourism for example. Conversely, other sectors have taken advantage of the crisis, like online activities (e-commerce, streaming services, video games), or have served as “safe investments”, like luxury goods.
The second word is without a doubt “uncertainty”. Given the tense geopolitical context and unprecedented capital injections in the economy, the current bright spell may lead in the relatively short term to another more classic crisis, made all the more dangerous as recent wounds will not have healed.
As advisers to innumerable economic players across the world, we observe an unprecedented de-correlation between certain market situations and the general state of the economy. On the one hand, the mergers and acquisitions market, boosted by an unparalleled level of liquidity, has rarely – if ever – experienced such exuberance both in volumes and in prices, and this was the case well before the crisis emerged. On the other hand, the corporate restructuring market is also very active, carried in particular by bank renegotiations for certain sectors in difficulty.
This paradox exists in appearance only: given the elements mentioned above, it is possible and quite natural to observe these two trends at the same time.
In this context, we think that, now more than ever, financial and economic players should avoid sheeplike behaviour and analyse each situation in an individualised and tailor-made way.
The most interesting cases to consider are certainly those sectors that are experiencing both positive and negative trends. The real estate sector is particularly relevant because it is undergoing profound and long-lasting change, combined with the effects of the last crisis. Let’s look at two representative sub-sectors: retail and office property.
The first has long been affected by the strong and continued development of e-commerce, a phenomenon that accelerated in 2020 under the effects of the lockdown and the closure of numerous shopping centres, to the extent that the value of retail property at the end of last year was at a historic low. Our long-held belief is that this fall in values was excessive, characteristic of the sheep like behaviour mentioned above and not adapted to the modern economy. Centres that are well located, well managed and well equipped will continue to be major players in retail. It is fortunate that, for a few weeks now, others are beginning to realise this and that these property values are rising again.
The second sub-sector benefitted up to the 2020 crisis from a favourable situation, thanks to a structural mismatch between supply and demand and real interest rates at zero that pushed up the so-called “safe investment” values like property. Moreover, the crisis has until now had little impact: for the most part, rent has continued to be paid and, given an extremely accommodating monetary policy, capitalisation rates and therefore values have changed little. But these two parameters are now threatened. The rise of remote working, if it proves to be long-lasting and significant (more than just one or two days a week), will inevitably have considerable consequences on the number of square metres necessary for office space as well as its location. Not all of these impacts will necessarily be negative: though it is certain that large business centres like La Défense and Canary Wharf are suffering and will continue to suffer, central business districts may see their values and occupation rates continue to rise.
As for macroeconomic parameters, and notably inflation, only an oracle could predict how they will develop: the only thing to do is to remain vigilant and to provide the means to minimise fragility through strategies that favour flexibility and agility. In this respect, it will be essential to monitor the development of the banking sector, but that would be a topic for another discussion…
* “THE MYRTLES HAVE FLOWERS THAT SPEAK OF THE STARS AND IT IS FROM MY PAIN THAT THE DAY IS MADE THE DEEPER THE SEA AND THE WHITER THE SAIL AND THE MORE BITTER THE EVIL THE MORE WONDERFUL THE GOOD”
LOUIS ARAGON
“THE WAR AND WHAT FOLLOWED” (FROM THE UNFINISHED NOVEL)