Covid-19 lays bare the weakness of EU businesses

As a second wave of the Covid-19 pandemic is taking hold of Europe, the European Union, with its high welfare and healthcare standards, seems to be able to withstand it better than the US.

But if in terms of public health this may be true, in economic terms EU politicians and policymakers should use this once-in-a-lifetime opportunity to understand that the EU risks falling behind the US and China — and to take measures to prevent that.

Analysing which companies have fared well so far during the pandemic shows the difference between various regions of the globe, as well as the reasons behind that difference. One example of how to go about doing that is illustrated below.

In May, when the first wave of the pandemic was still sweeping across Europe, stock market strategists at Societe Generale created a global basket of 58 companies exposed to the social distancing theme, and which benefited from the changes that Covid-19 forced upon our way of living.

The basket has gained 34% since it was launched on May 14 2020, while the MSCI World Index has been up 24% during the same period.

Certainly, this period is too short for a meaningful conclusion, and investors should never base their expectations of future performance on past performance. Having said that, the basket’s composition is crucial for understanding the differences between regions.

Some sectors are more exposed to damage from Covid-19 than others.

The Societe Generale strategists selected stocks of companies listed in developed markets and Korea, with market capitalisation higher than $3.0 billion and an average daily value higher than $5.0 million, and exposed to one or more of four themes identified as crucial to do well during the pandemic.

The four themes are: work mobility, online retail and delivery, study from home and play from home.

Out of the 58 basket components, 17 are European stocks; of these, only three are in the technology sector. Eight are in discretionary, three in communications, two in industrials and one in staples.

The US has 26 components, of which 16 are technology stocks. China has 10 of the basket components, of which seven belong to the discretionary sector.

Regional breakdown of some of the companies doing well during the Covid-19 pandemic. Source: Societe Generale

Looking at the themes identified, Europe is again at a disadvantage. Its companies mainly serve the online retail and delivery sector, with 10 of them in that category. Work mobility and play from home have three European companies each, while only one is part of the study from home theme.

Of the US companies, an overwhelming majority — 16 — belong to the work mobility category, which is likely to be the most lucrative by far. Seven belong to the play from home category, two to study from home and one to online retail and delivery.

Looking at the Chinese companies, four of them belong to the study from home category and four to online retail and delivery, while work and play from home have one company each.

Of course, this is not a complete categorisation of all companies in these regions, so no absolute conclusions should be drawn from this example. Still, the fact that Europe is so retail-heavy and technology-light should worry politicians and policymakers.

Sector breakdown of some companies doing well out of the Covid-19 pandemic. Source: Societe Generale.

One big reason for this is the incredible bureaucracy that businesses have to face in the EU compared with the US, on everything from setting up a business to renting office space and employing people.

Another, perhaps just as important factor holding back EU entrepreneurs is the tax system, which is very fragmented across the 27 members of the union and which does not offer many facilities to entrepreneurs.

A third, perhaps equally important factor is the education system, which in many countries in Europe still relies on rote learning and does not allow for much leeway when it comes to accommodating innovative pupils.

The Covid-19 pandemic has shown the world once again that people and businesses can quickly adapt to situations they had not faced before. It has also shown which companies have adapted best.

For the EU, the pandemic should also serve as a reminder of all the things it needs to change in order to keep its economy competitive.