It would appear that normal service has resumed this morning, as after two days of modest gains, markets in Europe have tumbled sharply this morning. The recent stabilisation in prices had been touted in some quarters as evidence that perhaps the worst of the declines of the last quarter may well be behind us. In reality the recent rebound was probably due to month and quarter end rebalancing of portfolios.
Talk of a bottom in equity markets still seems remarkably premature given the continued increase in infection and death rates across Europe and the US. There is some optimism that the infection rate in Italy might be levelling out, however that doesn’t change the fact that economic activity as we know it is unlikely to rebound to anywhere close to the levels, we saw at the end of Q4, when, even then, economic activity was already slowing.
Investors and market participants more broadly need to come to terms with the reality that the world as we know it is unlikely to be the same as the world we saw at the end of 2019. That more than anything makes it much more difficult to predict what a fair valuation is likely to be as we look towards the next decade.
With more and more companies cutting dividends and buybacks, as well as bonuses and salaries, the year 2020 is likely to be an extremely painful one for shareholders and pension funds more broadly, who rely on the dividend incomes to pay out to existing pensioners, while also growing the pension pot for future pension needs.
Markets in Asia had another mixed session, with the Nikkei 225 sliding back, and while we did see a rebound in the latest Chinese Caixin manufacturing survey to 50.1 for March, the fact remains that the rebound in economic activity in China is coming from a base of a complete shutdown.
Furthermore, oil prices are still on the back foot as storage capacity continues to fill up in a world where demand has been crushed and the taps are still open wide. The black stuff also had its worst ever quarter sliding over 60%, with most of that decline happening in March, and has started April in a similarly negative vein dragging the oil majors lower in early trade, with BP and Royal Dutch Shell on the back foot.
The banking sector is in the spotlight today after the Bank of England urged banks in the UK to cut their dividend payouts, and any buybacks in an attempt to conserve cash. This echoes what the European Central Bank told banks in Europe to do yesterday. The Bank of England also told the banks to cut bonuses for top executives. In response, all of the UK’s biggest banks have said they would be doing exactly that, with the big falls for HSBC and Standard Chartered in Asia markets being replicated here in London trading this morning. Lloyds Banking Group, Barclays and Royal Bank of Scotland are all sharply lower in early trading.
While this is likely to be disappointing for shareholders, it is an entirely sensible course of action for a sector that still has a PR problem 12 years on from the financial crisis, and which will be expected to do some heavy lifting for UK businesses over the course of the next 12 months, with the help of the Bank of England’s new small business funding programme.
This is also why the Bank of England relaxed the various capital restrictions on the major banks in order that they could support UK businesses in the coming months. In short, paying out dividends and huge bonuses is not a good look at a time when money is likely to be tight, and the UK economy needs all the help it can get. There is also the likelihood that these banks may well have to absorb much higher credit losses in the weeks and months ahead.
Airlines are also set to remain under pressure after IATA projected that airlines globally were set to lose $39bn in Q2. For the full year, revenues could decline $252bn, that’s well up from a previous assessment that put the number at the upper end of $113bn, at the beginning of March.
The airline body went on to say that some airlines could well go out of business by the end of June unless action was taken to keep them viable, putting the focus back on the more vulnerable players in the industry. Amongst the early fallers early on are Air France KLM and Lufthansa.
That in turn could well prompt more airlines to cancel pending orders for new aircraft as they attempt to conserve cash, which in turn is likely to turn investor attention to the likes of Airbus and Boeing who currently have large order books of hundreds of new aircraft. These numbers could well start to come down sharply in the months ahead, and investors need to start to prepare for that if they haven’t already. Airbus shares are lower by over 5% in early trade.
The belt tightening is also happening in the house building sector as Taylor Wimpey announced the cancellation of a 2% pay rise, the scrapping of executive bonuses and a 30% pay cut in base salary and pension for the duration of the government lockdown period. The share price has subsequently come under pressure, dragging the rest of the sector down with it.
While manufacturing activity in China appears to be picking up, albeit from a very low base, manufacturing activity in Europe in March has undergone its own China syndrome moment with economic activity in Spain and Italy showing similar falls to the flash numbers we saw from France and Germany last week.
Spain manufacturing PMI slid to 45.7, from 50.4, while manufacturing in Italy came in at 40.3, down from 48.7 in February, as the lockdown put economic activity into the deep freeze.
France and German manufacturing PMIs weren’t expected to be materially different to last week’s flash numbers of 42.9 and 45.5, coming in at 43.2 and 45.4 respectively.
US markets ended the month and the quarter with a whimper yesterday, drawing a line under the worst ever quarter for the Dow and the worst quarter since 2008 for the S&P500. These declines look set to continue this morning as investor gear up for a firestorm of negative data over the next three days, starting later today with the latest ADP employment report for March. In February these numbers came in at 183k. This is likely to go into full reverse with a negative number of 150k expected, which seems quite modest when set against last week’s weekly jobless claims number of 3.3m.