Supply chains at risk
Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets last week (17 – 21 February 2020).
Apple became the first major US company to say it won’t meet its revenue projection for the current quarter due to the coronavirus outbreak, citing limited iPhone production and curtailed demand from China. There was also a warning from the world’s largest shipping group and airlines such as Qantas and Air France-KLM detailed the impact on their business.
Both the FTSE 100 and the FTSE 250 were broadly flat over the week by mid-session on Friday.
A series of global events have conflated and will result in a hit to world economic growth this year. It has raised the possibility of a recession in some countries. John Redwood explains why we are on “recession watch” here.
The coronavirus outbreak accelerated outside China, with South Korea reporting a surge in infections. China adjusted the number of cases for the third time this month, raising more questions over the reliability of the data.
China introduced new stimulus measures to shore up the economy. The People’s Bank of China cut its one-year loan prime rate to 4.05% from 4.15%. It also lowered its five-year rate to 4.75% from 4.8%. Authorities are also planning to introduce tax cuts and inject liquidity into the system.
China plans to take over indebted conglomerate HNA Group and sell off its airline assets, the most dramatic step to date by the state to contain the deepening economic damage from Covid-19. As the Chinese government props up the heavily indebted conglomerate, which had gone on a debt-fueled acquisition spree, the Chinese government now owns about 5% of Deutsche Bank and may soon own 20% of Atlético Madrid.
Moody’s cut its growth forecasts for the world’s largest economies due to the impact of the coronavirus. It now expects the G20, which includes China, will grow by 2.4% in 2020, down from 2.6% previously. Singapore’s Ministry of Trade and Industry downgraded its guidance range for the change in the country’s 2020GDP to between -0.5% and 1.5%.
Goldman Sachs warned about complacency over the impact of Covid-19. “In the nearer term…we believe the greater risk is that the impact of the coronavirus on earnings may well be underestimated in current stock prices, suggesting that the risks of a correction are high,” its chief global equity strategist Peter Oppenheimer told clients.
The gold price hit its highest in seven years on safe-haven buying. The dollar also strengthened.
Beijing said it will issue waivers on trade-war tariffs raised on imports of 696 types of US medical equipment from 2 March to help solve a shortage of medicines and medical products.
Chinese holidaymakers travelling to Britain spend about £10bn a year, but the outbreak has resulted in a tourism slump. According to the Chinese Ministry of Transport, there are normally 150 million trips made by people from the country every year. But so far this year, 73% fewer trips were made over the Lunar Holiday compared with last year.
Singapore has set aside 5.6 billion Singapore dollars (£3.1bn) in the coming year to help businesses and households tide through the ongoing coronavirus outbreak, minister of finance Heng Sweep Keat said.
South Korea warned it faced an economic “emergency” from Covid-19. President Moon Jae-in called for “all possible measures” to support South Korea’s economy, fuelling speculation that his government could launch a stimulus package soon.
The Financial Reporting Council (FRC) warned UK companies that they need to tell their investors what effect the Covid-19 epidemic in China was having on their business. Annual reports for 2019 are due and companies are required by law to disclose the main risks and uncertainties to their business in a meaningful and timely way. “We encourage companies to consider carefully what disclosures they might need to include in their year-end accounts relating to these events,” the FRC said.
Apple warned that it won't meet its financial guidance for the current quarter because of the Covid-19 outbreak, which has forced it to cut production of iPhones. All of its iPhone manufacturing facilities are outside Hubei province, and all have been reopened, but production is ramping up slowly. The biggest winner from the outbreak of Covid-19 is likely to be Donald Trump, because Chinese supply chains have been smashed. Garry White explains why here.
Foxconn, the biggest maker of Apple’s iPhone, has warned that its revenues will be hit by the coronavirus, but it did not say exactly how big the impact might be.
Danish shipping giant AP Moeller-Maersk said that it made weaker-than-expected fourth-quarter earnings and warned that it expects a weak start to the year with limited visibility for the rest of 2020 amid the outbreak. Maersk handles one in every five containers shipped by sea across the world. The US Agriculture Transportation Commission said the Pacific supply chain has been badly “compromised” and logistical issues were building up at US ports as well. Maersk alone has cancelled more than 50 trips to and from Asia in the last few weeks. It is likely there will soon be an acute lack of containers in both American and European ports.
Chinese car sales plunged 92% during the first two weeks of February as the situation kept buyers away from showrooms. It was even worse in the first week when nationwide sales slid 96% to a daily average of just 811 units, the China Passenger Car Association said. Jaguar Land Rover warned it could run out of car parts at its British factories at the end of next week, as the coronavirus halted supplies of essential components from China. Reports even suggested that the company had resorted to shipping parts over in suitcases.
There was another Covid-19-related profit warning from UK manufacturer Tekmar. Its shares plunged by almost 40% in the aftermath of a warning that the outbreak was hurting its business. Tekmar makes protective coverings for subsea cables, such as power links to wind farms and oil rigs.
There is now a good chance that global air traffic could fall in 2020 – the first time this has happened in a decade. Airlines warned of a severe financial impact as Covid-19 dampens demand for travel in Asia. Australia's Qantas said the outbreak would cost it up to A$150m (£76m), while Air France-KLM estimated a hit of up to €200m (£168m). Global aviation body the International Air Transport Association (IATA) said the outbreak will cost the world’s airlines a combined $29.3bn in revenue, a reduction of 5 percentage points on December’s estimates. The vast majority of the cost – $27.8bn – will be borne by carriers based in the Asia-Pacific, with Chinese domestic airlines losing $12.8bn alone. Unsurprisingly, China’s three largest airlines began the year with falling passenger numbers. Air China’s slipped 2.9% from a year earlier, while China Southern Airlines’ fell 4.6% and China Eastern Airlines dropped 5.4%. Cathay Pacific issued a profit warning because of the Covid-19 impact on its routes. It noted that first-half results would be “significantly down” on the prior year, as the group had also been hit by protests in Hong Kong.
Shower and tile manufacturer Norcros issued a profit warning on the back of concerns that its supply chain might be affected by the Covid-19 outbreak.
Volkswagen said it has pushed back the opening date for some of its operations in China. The German car maker said Saic Volkswagen – its joint venture between Volkswagen and Saic Motor – would restart operations on 24 February.
The global trade in goods is likely to remain weak, as disruptions from Covid-19 stem the flow of international commerce, which has already been hit by tariffs and economic uncertainty, according to the WTO. The WTO’s forward-looking Goods Trade Barometer stood at 95.5, compared with a level of 96.6 in November. Readings of 100 indicate growth over the next quarter in line with medium-term trends, while those higher or lower than 100 points to growth above or below the trend line.
The date of the UK’s budget remains unchanged despite the surprise resignation of chancellor Sajid Javid last week. The new chancellor of the exchequer Rishi Sunak has said the Budget will still be delivered on 11 March.
Britain’s chief Brexit negotiator, David Frost, warned Brussels that if the EU expected the UK to stay aligned with European rules forever, the bloc has failed to see the reason it had left in the first place.
EU chief negotiator Michel Barnier said the bloc was ready to offer an "ambitious partnership" with the UK post-Brexit, but its "particular proximity" meant it will not offer a “Canada-style” trade deal.
Low-skilled workers would not get visas under post-Brexit immigration plans unveiled by the government. It urged businesses to “adapt and adjust” to the end of free movement between EU countries and the UK.
EU leaders are in talks about its next multi-annual budget on how to replace the funding gap once Britain leaves the bloc. Talks hit an impasse as the prudent Northern members seek to keep their contributions under control.
There were more positive data releases on the UK economy. A measure of how Britons feel about their household finances hit its highest level on record. The IHS Markit Household Finance Index jumped to 47.6 in February from 44.6 in January. Also, UK manufacturing output grew at its fastest pace since April last year in January.
British manufacturers are starting to become more upbeat about the outlook, according to the Confederation of British Industry. Total and export order books improved to their strongest positions in six months and exports are now in line with their long-run average, the trade body said.
The Office for National Statistics noted that house prices rose across the UK in December – the first time that has happened since February 2018. Average house prices in the UK increased by 2.2% in the year to December 2019, up from 1.7% in the year to November 2019. The average price was £235,000 – up £5,000 year-on-year.
UK employment hit a record high. UK workers are finally getting paid at the same level they were before the financial crisis. Real regular pay increased by 1.8% to £474 a week between December 2018 and December 2019. This was the first time that real regular pay exceeded the pre-downturn peak of £473 recorded in March 2008. However, the annual rate of growth of both total and regular pay slowed in recent months.
UK inflation has risen to a six-month high of 1.8%. Economists had forecast a 1.6% rise in the Consumer Price Index (CPI). “The rise in inflation is largely the result of higher prices at the pump and airfares falling by less than a year ago,” Office for National Statistics statistician Mike Hardie said. The news sent the pound back above $1.30. Money markets have priced out the probability of a full 25 basis point rate cut from the Bank of England this year, betting an expansion in spending in Rishi Sunak budget next month will help will boost growth and inflation.
Is Donald Trump the new trade dove? Following reports that the US was considering new restrictions on exports of cutting-edge technology to China. Mr Trump intervened to stop his own administration developing plans to block sales of jet engines to China and other proposed restrictions on American exports. He said that national security was being used too often by his own officials to limit American companies’ ability to transact with China. The comments were in response to reports that cited senior administration officials saying they wanted to stop China developing its own passenger jets to rival Boeing and further hit Huawei. The reports also said the Trump administration may block foreign chipmakers, such as Taiwan’s TSMC, from selling components made overseas to Huawei.
Donald Trump’s acting chief of staff has warned there could be “a direct and dramatic impact” on the sharing of intelligence between the US and UK if Boris Johnson’s government goes ahead with allowing Huawei to supply equipment to build the British 5G mobile phone network. Speaking ahead of a meeting with Dominic Cummings and other British senior aides at Downing Street, Mick Mulvaney said the US was “very much concerned” about the issue.
President Trump’s pulling his own administration’s punches was welcomed by the chip sector in particular. “As we have discussed with the administration, sales of non-sensitive, commercial products to China drive semiconductor research and innovation, which is critical to America’s economic strength and national security," John Neuffer, president and chief executive of the Semiconductor Industry Association, said.
Exporters from most US states experienced a fall in sales to China last year, as tariffs hit business. Total US merchandise exports to China fell 11% last year to about $107bn, according to the latest data from the Commerce Department. Particularly hard hit were Texas, Florida and Alabama — which each saw sales plunge by more than 25%.
German exports to Britain fell for the fourth year running in 2019, according to Statistical Office data reported by Reuters. It noted that the weak pound had dampened demand and uncertainty over post-Brexit trade regulations disrupted existing supply chains. Exports of cars, aircraft and aircraft parts, electronic equipment and pharmaceutical products had fallen.
Donald Trump will visit India to meet prime minister Narendra Modi on 24 February. The US president said he is "saving the big deal" with India for later and he was “saving a big deal” with India for later and he “does not know” if one will be signed before his election in November. There had been some expectations that a bilateral deal may be signed on the visit, but this now looks unlikely.
Germany’s central bank warned that its economy was still struggling, and could suffer from the coronavirus crisis in the months ahead. In its monthly update, the Bundesbank says it can’t see any economic change in Germany this quarter, a disappointing statement as the economy stagnated in the last quarter of 2019.
German economic confidence plunged once more. The February readings for the ZEW index of expectations – seen as one of the best early indicators of GDP growth – were weak and below consensus. However, the slump in German manufacturing eased in January.
The European Central Bank’s senior officials thought that easing trade tensions had reduced risks to the eurozone economy, according to minutes from its latest monetary policy meeting – although the meeting took place before the extent of the Covid-19 epidemic was clear.
The prospects of a recession in Japan increased. Japanese GDP shrunk 1.6% in the fourth quarter of 2019 on a month-on-month basis, or at a rate of 6.3% when that month’s figure is annualised. (Note GDP did not fall 6.3% in final three months of the year, as some news outlets quoted). The month-on-month fall of 1.6% was worse than market expectations for a 0.9% fall, prompted partly by the introduction of a new sales tax.
Billionaire Michael Bloomberg made his first appearance on a presidential debate stage – and received a drubbing from other candidates seeking the Democratic nomination. His performance was so poor that odds on his candidacy slumped in betting markets. National polling suggest that Bernie Sanders remains the lead candidate to scoop the nomination, less than two weeks ahead of “Super Tuesday”.
The European Commission thinks that big tech companies such as Amazon, Facebook and Alphabet’s Google be forced to share the mountains of data they hold on its customers with smaller competitors. The bloc unveiled plans to create a single market for data that will help its companies compete on the next round of tech innovations and curb the power of data. Officials also released a paper on artificial intelligence, proposing first-of-their-kind rules to govern the technology's use. By leveraging the massive amounts of data generated within its borders, the EU hopes to foster a fresh wave of development in industries such as transportation and health care, while levelling the playing field for the smaller companies currently unable to compete with large US and Chinese companies. Garry White explains how Big Data could help with outbreaks such as Covid-19 here and looks into how Big Data can help the healthcare industry here.
The dominance of US technology companies is clear in the latest weighting of MSCI’s World Index. Five companies exceed the total value of the whole Japanese stock exchange and exceed the combined value of the French, German and Dutch exchanges, the three largest in the EU. John Redwood takes a look here.
Brent crude futures rose 1.2% to trade at about $58 a barrel over the week by mid-session on Friday. The price rallied in the week but was hit on Friday on Covid-19 fears.
Global demand for liquified natural gas (LNG) grew by 12.5% to 359 million tonnes in 2019, according to Royal Dutch Shell’s latest annual LNG Outlook. It said that, over the longer-term, global LNG demand was expected to double to 700 million tonnes by 2040, as gas played a significant role in shaping a lower-carbon energy system. To see Shell’s presentation click here.
A Dutch court has upheld an appeal by shareholders demanding billions of dollars in compensation from the Russian state for breaking up Yukos, once Russia’s biggest oil company. The Appeals Court in The Hague said a previous Dutch court ruling in favour of the Russian state was incorrect and the original $50bn compensation award, made by the Permanent Court of Arbitration, was restored. Russia now plans to appeal.
Tullow Oil continued with its run of bad news. Management said it will plug and abandon its Marina-1 well in offshore Peru after drilling reached maximum depth without finding oil.
Petrofac announced that it had been awarded two contracts, together worth around $1.65bn, with Abu Dhabi National Oil Company in the United Arab Emirates.
First-half earnings at BHP surged 29% on the back of higher iron ore prices as the dividend was tempered by short term caution over the coronavirus. Nevertheless, the interim dividend was increased by 18%.
Anglo American’s full-year profits jumped 9% to $10bn, boosted by buoyant iron ore and precious metals prices, which offset a drag in coal and diamonds. Indeed, the scale of problems in the diamond industry was demonstrated by the fact that DeBeers posted its worst set of figures since it bought the 40% stake from the Oppenheimer family in 2012.
Chris Fraser, chief executive of Sirius Minerals has told the Yorkshire Post that a takeover from mining company Anglo American may be the only way to keep the company alive. Mr Fraser said he shared shareholders' disappointment with the price of the offer from Anglo but warned if the deal did not go ahead, Sirius would probably go into administration. Hedge fund Ode Asset Management said it would oppose the bid to buy the fertiliser project near Whitby, arguing that the terms do not represent fair value.
There was more bad news from the diamond industry, which may have scotched hopes at the end of last year of a recovery in the sector. Petra Diamonds shares slumped after the group posted an interim loss, despite increasing production. The top line was hit by a decline in diamond prices. Management said it expected to see further operational success “against the backdrop of a challenging diamond market.”
Walmart-owned Asda said customers were "cautious" over the Christmas period as it revealed its sales fell 1.3% on a like-for-like basis in the final three months of last year.
UK retail sales improved in January, increasing by 0.9% from December, following falls in the previous two months.
Fashion and home retailer Laura Ashley announced it had secured a cash lifeline to keep itself afloat, following fears it would run out of money. Sales fell by 10.8% in the second half of 2019.
The credit rating of iconic US department store group Macy’s was downgraded to junk by Standard & Poor’s.
Publisher Pearson said its sales of college textbooks in the US have fallen from 21 million in 2012 to just 2 million today, as students start to look online for their reading material.
Shares in Reach 4 Entertainment (R4E) soared after the theatre marketing company raised its forecasts for full-year trading. R4E, which runs marketing campaigns for West End shows such as Hamilton and The Lion King, said it expected to report revenue and profit “significantly” ahead of market expectations.
HSBC missed market expectations in its 2019 results by a substantial margin, with pre-tax profits falling by a third. The bank, which is the largest constituent in the FTSE 100 by weighting, also announced a major overhaul that would result in 35,000 job cuts over the next three years. Management plans to shrink its investment bank in the US and Europe. The capital will be redeployed in Asia.
Lloyds Banking Group posted a 26% drop in pre-tax profits to £4.4bn as it paid out billions of pounds to customers in payment protection insurance (PPI) compensation. The bill for PPI claims in 2019 would be about £2.5bn, but Lloyds said no further provisions were needed as it had already set aside enough money. It brings the total paid out by Lloyds over the mis-selling debacle to £21.9bn.
Recent UK storms could be costly for insurers. Aviva said that call volumes into its customer contact centre were five times higher than normal on 16 February. It also noted that claims received for Storm Dennis were significantly lower than for Storm Ciara, however, many more of its customers have been affected by flooding, the insurance company said in an interview with the BBC.
Jupiter Fund Management plans a takeover of its smaller rival Merian Global Investors. With Jupiter running £45.2bn in assets under management and Merian overseeing £22.4bn, the combination would create a £67bn fund giant.
Car finance provider Moneybarn has been fined £2.77m for treating customers unfairly when they fell behind on loan repayments. Moneybarn, which is part of Provident Financial, voluntarily repaid more than £30m to almost 6,000 customers potentially affected by the failings, the Financial Conduct Authority (FCA) said.
There was an interesting deal across the Atlantic. Morgan Stanley said it will buy E*Trade Financial, in a major move that suggests the US investment bank will shift to focus on retail customers. The $13bn deal is expected to be completed during the fourth quarter of 2020.
Airlines, travel & transport
Another week, another bad headline for crisis-hit Boeing. Debris was found in the fuel tanks of several new 737 Max planes which were in storage, awaiting delivery to airlines. The head of Boeing's 737 programme has told employees that the discovery was "absolutely unacceptable". A Boeing spokesman said the company did not see the issue further delaying the jet's return to service, but it adds to the negative sentiment surrounding the company, which has been accused of “cutting corners”.
Also, the US lawmakers took legal steps to remove a tax break for Boeing that is at the centre of a fight between the EU and the US. Legislators in the state of Washington, Boeing's main manufacturing hub, introduced the plan on Wednesday. They want to avoid a trans-Atlantic tariff war triggered by aircraft subsidies, the state's governor said. The US imposed tariffs on $7.5bn worth of European-made products last year as punishment for EU support for Airbus. Garry White looked at the tariffs when they were introduced here.
Qatar Airways upped its stake in British Airways-owner International Consolidated Airlines (IAG) to 25.1% from 21.4%. Qatar chief executive Akbar Al Baker said: "Our investment to date has been highly successful and the announced increase in our shareholding is evidence of our continued support of IAG and its strategy.”
DP World, one of the world’s largest port operators, pans to delist from the Nasdaq Dubai exchange and return to full private ownership. The majority of the group’s shares are owned by the state-owned Port and Free Zone World, which has offered to buy the 19.55% of DP World’s shares traded on the exchange. Company executives described the company’s public trading as ultimately too beholden to short-term returns.
InterContinental Hotels saw a slight dip in revenue per available room (RevPar) in 2019, a key industry metric, hurt by a fall in Hong Kong bookings due to last year's protests. The hotels group has 443 hotels in China under different brands. It said comparable RevPar fell by 4.5% in China, and 0.3% worldwide. There was no update on the impact of Covid-19 on its business.
GM will wind down its sales, design and engineering operations in Australia and New Zealand and discontinue its Holden brand in the region by 2021. The US automaker also announced plans to exit Thailand, including withdrawing Chevrolet by the end of this year and selling a plant to Chinese automaker Great Wall Motors, as the global industry retrenches.
Smith & Nephew guided to another year of revenue growth after topping annual sales expectations for 2019, helped by higher demand from emerging markets and growth in its sports medicine unit. Its shares hit an all-time high.
Shopping centre operator Hammerson said it will exit retail parks business by selling seven of them to private equity Orion for £400m, as it faces a challenging retail environment in the UK.
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Garry White is Chief Investment Commentator at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.