It’s A Complex World 8 Oct 2020
It’s A Complex World.
The stock market and the economy are still dominated by the effect of coronavirus. Hardly a day goes by without changes that have an impact upon Companies and people. Inevitably, such matters show just how interrelated business life is. It is like having a giant jigsaw puzzle and each missing piece makes it harder to find where the others go. There is no doubt that frequent errors are being made by ministers, but with an unprecedented situation on top of normal government duties, that is no surprise and it makes for confusing messages.
So far, stock markets are starting to recognise that the business landscape and human behaviour has changed and may not return to the patterns we are used to. Some of these changes are logical and some very surprising. Let’s look at a few examples. Many people are working from home and this has radically altered their economic activity.
Just when it seemed the Government would want people to go back to work, three weeks later the guide is to go back to home working. This just reinforces earlier trends. Not having to travel to work, means a cost saving for the family and so it is not surprising that consumer spending has held up quite well in certain home related durable goods.
Companies like UPGS, that supplies household products under well known brand names has had a good recovery. In the city centres, the pubs, restaurants and sandwich bars are suffering badly as spending is repositioned. I have never seen so many CVAs (Company Voluntary Arrangements) as businesses are wound down.
Among the silver linings is that for certain food manufacturers and retailers as food consumption moves away from restaurants and fast-food units and more people prepare food at home. Premier Foods has seen an 8% uplift on normal sales which is a big volume rise and who would have thought there would be a boom in people making their own sandwiches and even cooking meals with ingredients for the first time. There are other beneficiaries. This week, Halfords reported a bumper September with major bicycle sales, so that market forecasts for profits leapt from £35m to £55m.
The heightened risk of travelling means that buses and trains are well down on passenger numbers. This has led to a remarkable political change as the Government has had to financially prop up rail franchises, with even talk of nationalisation. The airline sector has also suffered and IAG (British Airways) has had to have a rights issue to raise funds, while Lufthansa has had a bail out from the German Government (so much for that illusive level playing field!) The knock-on effect has percolated down to Rolls Royce as both its aero engine sales and servicing have fallen away and it has now resorted to a large £2bn rights issue and £3bn of extra debt, which should just about see them through the 2-year period until aviation picks up.
For most businesses it is a question of matching capacity to a new lower level of demand. Without question, when the government’s generous support schemes fall away shortly, there will be increasing unemployment statistics, which may change consumer spending and savings ratios. You cannot, however, get these things right. Only in April, the Bank of England forecast a 16% fall in house prices, but that has not happened and the year on year increase is running at 5%. Another failed forecast from that esteemed institution! Working from home has encouraged people to move out of cities with their negative conditions, especially for families and move to market towns and rural areas, where houses have been selling in hours or days after coming onto the market.
So, it is a complex situation and winners and losers are not always clear. There is no doubt that when a vaccine is ready for mass use, there will be a major change in prospects. Some of today’s laggards could be the best opportunities around. By all means back the winners now, but if you own a badly affected stock and it has the resources to survive, it could be worth doing nothing and wait for the real recovery, when weaker competitors have fallen away.