We’ll be feeling the impact of Covid-19 for  a long time to come, in many different ways

Covid-19 has shaken capital markets globally, and the long-term impact will not be known for a long time.

Disruptive events tend to accelerate trends that are already in place, and Covid-19 will bring wide-ranging implications and deliver lessons into the future for organisations and individuals within the capital markets sector. Here’s some to chew on:

Digitisation, automation and cybersecurity

The most visible trend accelerated by Covid-19 is the leap forward in the digitisation of the economy. Westpac chief economist Dominick Stephens says there will be no going back: “that may be the last straw for some firms and a huge opportunity for others, but digitisation is a positive for the economy overall.”

Digitisation has long been mooted as a mega trend that will disrupt the capital markets sector, but the pandemic has necessitated a swift response. The past several months have exposed the requirement for firms to make a large number of decisions with increased speed and agility. Many expect the disruption to force firms in the capital markets sector to look at new operating models that are more automated and increasingly data-driven to address revenue challenges and drive down costs. This will include leveraging artificial intelligence, the cloud, machine learning and analytics to drive efficiency, improve productivity and improve competitiveness.

Increased competition from fintech firms has been eating away the market share from traditional players. Prior to Covid-19, industry giants in the capital markets were making moves to acquire and collaborate with fintech start-ups. This is expected to continue at pace, as they acknowledge openly the need for innovation to bolster their capability and agility.

However, the rapid digital transformation and changes in the way business is conducted has also brought with it a significant increase in fraudulent activity which will ensure cybersecurity remains an important consideration for capital markets. Cybersecurity firm McAfee’s quarterly report says there has been a surge of cybercrime exploiting the pandemic through Covid-19 themed malicious apps, phishing campaigns and malware. The US Federal Bureau of Investigation said it had received as many cyber-attack reports by the second week of June as it had in all of 2019.

Impacts on people, ways of working and the gender pay gap

The pandemic changed the way employees around the world worked and engaged with their workplaces and proved that remote and flexible working is possible — even in capital markets where some firms have been reluctant to embrace the trend. While most workers in New Zealand have now returned to their workplaces, many agree there were values that became more pronounced during lockdown that we should try to hold on to. Organisations are now considering how they can be more flexible, agile and have a heightened awareness of employee wellbeing. At the same time, they want to ensure that the quality of work and productivity remains high.

A recent EY article questions whether this flexibility, reprioritisation of goals and consideration of what is important could help to close the gender pay gap. Firms in the capital markets are continuing to face requirements to become more diverse. In Europe, France is demanding a 40 per cent quota of women on boards. The UK has had more than 350 financial services firms sign up to the UK Government’s Women in Finance charter, where they set targets for gender diversity. But despite this, the World Economic Forum’s Global Gender Gap Report 2020 revealed that gender parity will not be attained for 100 years.

EY notes the “wholesale levelling of the playing field” has the potential to challenge HR, talent and recruitment and lower long-standing barriers including those for parents with children or those with other caring responsibilities.

Cashless society edges ever closer

The arrival of a cashless society has been long-anticipated, but the events of this year have no doubt accelerated its arrival. Kiwis have embraced mobility and connectivity, and Covid-19 has seen us become more comfortable with e-commerce, Auckland Transport go cashless, and many stores encouraging cashless payment for hygiene reasons — with the contactless eftpos limit temporarily raised from $80 to $200.

The Bank for International Settlements released a bulletin in April, noting that Covid-19 has fanned public health concerns around the use of cash. It said that looking ahead, developments could speed up the adoption of digital payments around the world, including central bank digital currencies.

In China, digital payment platforms are already widespread, including Alibaba’s Alipay and Tencent’s WeChat Pay — so much so that in many stores cash is not accepted. Taking this a step further, China is launching a pilot programme of its digital yuan in four major cities. The currency is backed by China’s central bank, the People’s Bank of China, and is pegged to the national currency. Commentators say the objective of the digital yuan is to increase its circulation and become a global currency like the US dollar, and that the timing of the launch — when the rest of the world is dealing with the global pandemic — provides China with an unusual opportunity to beat private competitors such as Facebook’s Libra currency.

Surge in sustainable investing

During lockdown, many appreciated the return of birdsong to inner-city neighbourhoods and the quiet that came from the severely reduced traffic. Satellites mapping air pollution revealed a significant drop in nitrogen dioxide concentrations across Europe and China, coinciding with the strict quarantine measures.

Analysts are predicting Covid-19 to be a major turning point for ESG investing, or strategies that consider environmental, social and governance performance as increasingly important alongside financial metrics. The pandemic has highlighted how connected humans and society are to nature, plainly demonstrating how a fracture in one part of the ecosystem can compromise the entire system.

A survey of 50 global institutions by J.P. Morgan, representing US$12.9 trillion in assets under management, asked how they expect Covid-19 to impact the future of ESG investing. Some 71 per cent of respondents say it was “rather likely”,   “likely”, or “very likely” that a low probability — high impact risk like Covid-19 would increase awareness and actions globally to tackle high impact — high probability risks such as those related to climate change and biodiversity losses.

There is a massive opportunity in front of us to capture premiums. Without doubt, our brand story is at an all-time high at the moment because of what we’ve done with Covid.

NZTE chief executive Peter Chrisp says the impact of New Zealand’s Covid-19 lockdown had immediate consequences for its customers — New Zealand exporters.

“I’ve always worked hard. I’ve never worked this hard,” Chrisp said at an interview at NZTE’s Wellington head office.

Even prior to the coronavirus pandemic hitting New Zealand’s shores, the agency was heavily involved providing support to its customers exporting to the China market.

“So that was the beginning of it, and then it just unfolded, into Italy and South Korea.”

When New Zealand entered the alert level four lockdown phase, one of the immediate issues Chrisp’s team needed to face was how to support airfreight. With passenger traffic severely limited, there wasn’t a functioning airfreight market, which many of our high-value exports — including seafood and honey — depend on.

NZTE co-ordinated around 200 charter flights to key export markets, including Shanghai, Los Angeles, Tokyo, Singapore and Australia: “We got good backing from the ministers and the Ministry of Transport. We underwrote the capacity of the plane — the last 20 per cent of the plane.”

He said if a chartered plane wasn’t full it wouldn’t leave. The underwrite didn’t have to be used very often, but it was an important mechanism to provide certainty to exporters that their goods would make it to market.

In the medium term, a new initiative with funding allocated from the May budget will focus on supply chains, building firm capability in freight and logistics and helping to build capability within export firms.

Another of the initial challenges for exporters was ensuring sufficient cashflow for business continuity. NZTE formed partnerships with Deloitte, PwC and KPMG to provide a business continuity service for around 500 of its customers.

“From that, they got a bit of a plan about how to respond immediately, how to get their cash under control and what to do with their working capital and inventory,” Chrisp explained.

“I’ve been talking to some specialist manufacturers who would normally sell mostly through attending conferences, relationships with procurement mangers, and foot traffic. They are now wondering how they reach their customers.”

Many are turning to digital – which Chrisp said is one of the biggest things NZTE is engaged with at the moment. This will include scaling up e-commerce capability to provide digital commerce content, tools and advice to more exporters.

Keeping track of its current suite of clients, NZTE has developed a heat map that runs a ruler over companies and considers which companies that are thriving, surviving, or struggling.

Chrisp said this gave the agency a good feeling for where the hotspots were, and at the start of the crisis it was the export-dependant specialist manufacturing firms that he was most concerned about.

He said that though a lot of the customers of specialised manufacturing firms were considered essential overseas, they weren’t here — which had made things difficult.

The heat map is now showing around 32 per cent of companies thriving, 60 per cent surviving and about 8 per cent struggling.

“The thriving companies are across categories like food, manuka honey, nutraceuticals. But even in tech you’ve got companies involved with education software or gaming software that are doing well,” though Chrisp noted, you’ve also got people struggling in those categories as well. The Ministry of Foreign Affairs and Trade (MFAT) has developed a trade recovery strategy to address that. MFAT says the next phase of New Zealand’s response is recalibrating New Zealand’s trade policy for a new international environment.

The strategy, launched by trade and export growth minister David Parker, has three pillars: retooling support for exporters, reinvigorating international trade architecture, and refreshing key trade relationships.

NZTE will play a key role in this — in particular, Chrisp said it will be the custodian of the retooling pillar.

“The Government knew it couldn’t just rebuild New Zealand with a domestic fiscal spend. You need an international export recovery leg — and I think you need an investment recovery leg as well.”

Some of the $216 million funding boost it received through the Budget will be used to significantly increase the number of exporters that receive intensive support from NZTE. The agency says that collectively these exporters directly employ over 200,000 people. About 75 per cent of these firms are expected to be SMEs with 50 or fewer employees.

“We will have more customer managers that can deal with more New Zealand companies and services — and more boots on the ground in premium international markets,” Chrisp said.

Business development managers in key offshore markets will be particularly important for exporters while international travel remains restricted. It is envisaged that this team will be able to carry out additional functions for companies in-market – including meeting customers, vetting new employees, and selecting distributors.

Another portion of the funding has been allocated to expand the International Growth Fund, which helps reconnect companies with international markets and supply chain partners, as well as explore new opportunities.

Chrisp said he is keen to uphold the sense of the opportunity in front of New Zealand — particularly in the food and beverage sector.

“We’ve had food and beverage manufacturers in New Zealand that responded very well during Covid.

“The opportunity to be the most keeps agri exports flowing sustainable food producer on the planet is quite a niche — quite an exciting niche.”

One area that Covid-19 might help New Zealand is by spurring the acceleration of the shift from volume to value. Chrisp said food and beverage is at the sharp end of that.

“There is a massive opportunity in front of us to capture premiums. Without doubt, our brand story is at an all-time high at the moment because of what we’ve done with Covid. There is an opportunity to double-down on that brand story and those sustainability settings.”

“The health competitor advantage — growing food and beverage out of this healthy country and the intersection of innovation with our food and beverage story and our agritech sector, there’s some really great things that we can accelerate and advance around this.”

But, said Chrisp, a key challenge for New Zealand will be keeping the New Zealand brand alive in international markets over the next 12 months without international travel.

NZTE is working on strengthening New Zealand’s brand in priority markets by maintaining, promoting and broadening New Zealand’s brand appeal, particularly while the tourism sector is recovering.

Chrisp said it will re-emphasise New Zealand’s reputation for safety, trust, resilience, ingenuity, sustainability and high-value goods and services using the highly successful New Zealand Story strategy.

“When you think about who is probably likely to carry the New Zealand brand story, it is probably food and beverage and tech, because there are such good stories wrapped around those products and services.

“If our food comes out of a Covid-free country, it’s good for human health and it’s got a story wrapped around it about the quality of the country — that’s a particularly good story that will resonate in premium markets.”

Chrisp said it comes back to the underpinning values of kaitiaki — our role as guardians of people, place and planet and protecting what is precious over generations. We think that Covid has demonstrated that story.

“Our high integrity, high transparency, our very low corruption and our ingenuity — they are underpinning values that we think will resonate well on the international stage.”