This article first appeared in Forum, The Edge Malaysia Weekly on June 7, 2021 - June 13, 2021

After a tumultuous year for global business, fledgling signs of a post-Covid-19 economic recovery offer green shoots of hope. Not only does this provide a welcome aura of optimism, early signs indicate this recovery could be accelerating at a faster pace than might previously have been expected.

The World Bank estimates that the global economy will expand 4% in 2021, following a 4.3% contraction in a challenging 2020. The growth projections for East Asia and Pacific are more positive still, predicted to accelerate 7.4% in 2021. This is expected to be driven by buoyant recovery in China, and significant rebounds in Southeast Asian countries such as Malaysia and Vietnam.

Whether this optimism is fully justified or merely the economic consequence of a stimulus-funded global growth cycle that is not yet fully understood is largely irrelevant. The signs indicate that the world is now entering a period of reopening economies, the gradual return of free-flowing capital, and an invaluable opportunity to once more kick-start growth.

Preparation for recovery and growth will require finding the right balance between conserving cash and investing in innovation and the programmes needed to succeed in a new commercial landscape.

Five pillars of conversation for the rebound

Conversations of the recovery are tinged with increasing optimism, framed by several central themes that are persistent and recurring in business discussions around future potential growth.

Cash is key. Balance sheets have become a key focus, following the Covid-19 pandemic. Economic closures, social distancing and evolving consumer behaviour have dented revenue streams and inflated costs across many sectors. While most companies have emerged from the pandemic with balance sheets intact and industrial companies continue to benefit from rising commodity prices with surging industrial activity, the stress that companies have faced has left an indelible imprint on balance sheets.

All companies are now looking at liquidity management with a more jaundiced eye — shortening cash conversion cycles, exploring innovative approaches to procurement, delaying capital investments, restructuring unsustainable debt levels, and ensuring more transparency and control over cash flows until there is a more certain landscape underfoot. There is undoubtedly a sense that companies remain shy of substantial investments until there is firmer indication that returns will be commensurate to investments.

ROIC trumps TSR. Return on invested capital (ROIC) is likely to be preferred over total shareholder return (TSR) as a metric of success during this period. While most companies recognise that TSR is the single unifying metric to define and contrast performance in comparison to previous years or competitors, there is an increasing awareness that ROIC may be a more pragmatic view, given the volatile business environment today.

ROIC offers a more robust measure of whether actions taken deliver results without the influence of market forces because, although a rising tide raises all boats in today’s volatile climate, it is hard to trust TSR as the only measure of performance in that buoyant sea. After all, market forces are unpredictable and often speculative.

Portfolio diversification. The challenges of the Covid-19 pandemic have also inspired some candid conversations about company portfolios, with boards asking management teams some hard questions about the balance of core versus non-core investments. The outcome of these delineated priorities is likely to trigger even more searching questions about why dollars should be deployed against those identified non-core investments.

Is diversification sufficient reason for a non-core investment? Is there compelling evidence that a company can retain advantaged positions in non-core investments, given the transformation in the business landscape? How can non-core investments be monetised at the appropriate valuation to support growth? These are all good questions that are now being asked more actively and will require considered responses.

Business diversifications and realignment of the value chain have now become important conversations — even more so for unprepared businesses operating in less-resilient industries.

Three pathways to growth. The overarching conversations about growth also feed into existing questions of finding the balanced pathway to success. Companies are faced with a business landscape that has been through a period of enforced transition, not only creating financial pressures but new hunger for growth.

Three big themes that existed prior to the pandemic are now amplified by our recovery from it.

•    Companies are considering the growth value of lean asset-light business models;

•    Companies continue to search for downstream value pools to get close to customers; and

•     Taking a bet on digitally enabled businesses remains a temptation, owing to high valuations and optimism.

Accelerated digitalisation. The impetus for companies to digitally transform has been on the agenda of CEOs for years. But the pandemic has made this an imperative, and companies no longer have the luxury of taking their time to embrace this change. There is now paramount focus on accelerating digital transformation, modifying business models and improving innovation — all while keeping a tight control on costs and improving cash flow.

Times of crisis inevitably trigger times of rapid transformation. As we move deeper into the post-pandemic upswing and look at the world renewed through rose-tinted glasses of optimistic growth, perhaps now is the time to fortify our positions through strengthened liquidity, well-judged investments and justified diversification.

Ricole Tan is partner and director and Zarif Munir is managing director and senior partner at Boston Consulting Group

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