05 May 2020
Leo ‘The Lip’ Durocher, one of the greatest baseball managers in history once said: “Baseball is like church. Many attend, but few understand.” Thanks to the coronavirus however, these days few even attend.
Even though Taiwan’s government, which has done an exceptional job in suppressing the spread of the virus, reopened its high-profile baseball league on the 11th April, only cardboard cut-outs were able to attend. Is this how lockdown ends?
While many countries announced the softening of lockdown measures last week, causing stocks to rise in response, the global number of cases also passed 3.5 million. Numerous states across the US allowed businesses across several sectors to reopen shops, offices and factories; Texas also allowed retail outlets, malls, restaurants, museums, libraries and cinemas to open on Friday, keeping to 25% capacity.
All over Europe, meanwhile, government have been laying out their plans to soften lockdown. Italy, for example, will open shops and tourist and cultural venues on 18th May, restaurants on 1st June, and schools after the summer holiday. France, Spain and Germany are also looking to loosen measures during May; the UK has yet to announce any plans.
These announcements, combined with support measures pledged by governments and central banks, buoyed the S&P 500 for most of last week, which allowed it to end its best calendar month since 1987. It ended the week marginally down, however, after corporate results weighed on Friday trading; S&P 500 constituent companies are facing their worst earning season in a decade, with a similar tale to be told on the FTSE 100. China’s CSI 300 and Europe’s EURO STOXX 50 both ended marginally up.
While the FTSE 100 briefly broke through 6,000 points for the first time since the beginning of March, announcements from constituent companies that they were cancelling or cutting their dividend brought it back down. Among these announcements was Royal Dutch Shell, the largest company on the index.
Recovery for two of the engines for energy sector growth, travel and tourism, is not expected any time soon. It is the countries who rely on these sectors that are particularly vulnerable, even as the global economy slowly recovers, according to analysis last week by Capital Economics.
The analysis suggests that while it may be a global crisis, the consequences are liable to vary widely between countries, and sees three other groups of countries particularly at risk to a ‘very protracted recovery’: those that fail to get the virus under control (it attaches warnings to countries in sub-Saharan Africa, Latin America and the Indian subcontinent); those where the fiscal cost of current measures will overly strain debt-to-GDP ratios (southern Europe, Japan and, to a degree, the US); and those where a deeper downturn could be precipitated by a banking crisis (it cites Turkey’s banking sector as poorly capitalised).
“Governments in developed markets have generally been quick to offer both direct assistance, such as wage subsidies, and big loan guarantee programmes, but the experience in emerging markets has been more mixed,” said Capital Economics. “This links to our previous point about debt sustainability; countries with weak public finances, such as Brazil, will generally be more reticent to stand behind their private sectors. Mexico and India have been slow to provide support, too.”
Central bank support
Of course, it hasn’t just been the governments providing support – it’s come through central banks too, often in extraordinary form. Last week, the European Central Bank expanded its stimulus programmes, offering helicopter money for banks of up to €3 trillion at negative rates. While it also emphasised willingness to use all its tools to prevent a prolonged downturn, it skirted over the sensitive topic of how far it will offer a backstop for Italian debt.
The Federal Reserve has also been throwing out the rulebook on who it lends to and what risk it takes on. Last week, it incorporated larger businesses (those with up to $5 billion in turnover) into its $600 billion lending scheme.
“The latest move will help a little bit,” said Pete Drewienkiewicz, Chief Investment Officer for Global Assets at Redington. “But it doesn’t do much [because] the programme is still being implemented by banks, who don’t really lend to small and medium-sized enterprises much anymore, and because it’s capped at six times leverage, which is a blunt measure that takes no account of business structure or profitability.”
Growth and companies
Despite stock rallies, fresh indicators showed the scale of the economic damage suffered over recent months. Eurozone GDP is down 3.8% and US GDP by 4.8% – the biggest US quarterly fall since 2008, with the chief culprit consumer spending. And it might not get better soon, as a White House senior advisor said last week that second quarter US GDP is likely to be between -20% and -30%.
At a corporate level, income investors have been feeling the pain of a record number of companies announcing dividend cuts (see In the Picture, below). When it came to the world’s largest companies, Apple was a notable disappointment on the results side, but still chose to raise its dividend significantly. And even while Amazon’s business model could benefit from a lockdown economy, they had mixed news for shareholders – sales surged, but so did virus-related costs. Prefacing his announcement to the shareholders, their CEO said: “You may want to take a seat.” Its share price duly took a bow.