Will the virus cause a recession?

Garry White, Chief Investment Commentator, looks at the market-moving events that have shaped equity markets last week (24 – 28 February 2020).

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The escalating coronavirus situation has now caused a market correction, defined by a fall in an equity index of 10% or more. Indeed, global equities had their worst week since 2008, the start of the financial crisis, as the virus that emerged in China late last year spread around the world

Wall Street indices plunged into correction territory and commodity prices fell sharply, including oil. Supply chains have been hurt and global growth this year will be lower than originally expected. It is also likely that the Chinese economy will contract in the first quarter of this year.

Companies have halted business travel and conferences have been cancelled. Other events where large people gather, such as concerts, are now under threat. However, the World Health Organisation is yet to declare that the current outbreak an official “pandemic”. This has caused some confusion. However, according to the New Scientist magazine: “Countries have pandemic plans that are launched when one is declared, but these plans may not be appropriate for combating Covid-19 – and the WHO doesn’t want countries to lurch in the wrong direction.”

The FTSE 100 was down 11.4% by mid-session on Friday and the FTSE 250 had shed 12.6%.

What will happen next remains unclear and difficult – if not impossible – to predict. John Cunliffe, Charles Stanley’s Chief Investment Officer, looks at the current market situation here.     

Coronavirus (Covid-19)

The market was finally shocked out of its recent complacency about the impact of Covid-19 on supply chains and markets.

Outgoing Bank of England governor Mark Carney said the Covid-19 outbreak will hurt economic growth, but the impact was difficult to quantify.

Goldman Sachs said it thought the outbreak would reduce earnings growth at US companies to zero this year. "The trajectory of the US and global economy is highly uncertain at this time," Goldman said, adding that "a more severe pandemic could lead to a more prolonged disruption and a US recession."

Chinese political leaders, including President Xi Jinping, will miss the annual parliament session in March, the first time this has happened since the Cultural Revolution.

Airlines and travel companies were hit hard by the outbreak as holidaymakers in a hotel in Tenerife were confined to their rooms after an outbreak of the illness in a hotel. Shares in Tui, easyJet and Ryanair fell sharply. Indeed, easyJet says it is cancelling some flights, including services into and out of Italy, as a result of the coronavirus outbreak. Finland’s Finnair also issued a warning that its profit will be hit.

Willie Walsh, the chief executive of British Airways owner IAG, said he wasn't sure how the coronavirus could impact its profits in 2020, but stressed that the airline owner had gone into the year with "a very strong balance sheet" and almost €7bn in cash.

SSP Group, which operates food businesses such as Upper Crust in travel hubs, warned it expects to take a £5m profit hit in February as sales in the Asia Pacific region halved this month due to the virus outbreak.

Shares in aviation services company John Menzies fell after it warned the coronavirus outbreak was having a direct impact on its operations.

US-based hotels group Marriott said that the virus could cost the company $25m a month in lost sales.

US-listed shipping group Golden Ocean warned its profit would be hit by a slowdown in demand due to the coronavirus outbreak in China.

Primark-owner Associated British Foods said it was considering ramping up production from outside China, as its supply chains were being hit by the outbreak. Management expects Primark will be the main driver of growth in the six months to the end of February. Although there will be no short-term impact, the company said there was a risk of supply shortages later in the year if its Chinese factories remained closed for prolonged periods.

Microsoft said it would miss the third-quarter guidance it set out earlier this year for its personal computing segment due to supply chain disruption in China.

The closure of bars and the reduction in airline travel has resulted in profit warnings from drinks groups. Diageo, the maker of Guinness stout and Smirnoff vodka, said Covid-19 would slash annual sales by up to £325m. ABInBev, the world's biggest brewer, said the outbreak had resulted in lost revenue of approximately $285m and lost operating profit of approximately $170m in China. Pernod Ricard also cut its guidance.

Asian focused bank Standard Chartered said that operating income growth would be lower than expected this year due to the impact of Covid-19. The news came as it posted full-year numbers that were slightly below market expectations.

Shares in carmaker Aston Martin Lagonda hit a record low after management said it expected “materially lower” sales in 2020 as it warned that the Covid-19 outbreak could hit its supply chain and sales.

Mastercard cut its outlook after the coronavirus reduced international travel and growth in internet spending. The payments company said revenue would rise by 9% to 10% in the first quarter, which is 2 to 3 percentage points lower than guidance published in January, if current trends continue to the end of the quarter.

Engineering and environmental consultancy Ricardo warned that the virus outbreak will have a "material" impact on annual profit after the virus hit the engineering consultant's orders and projects.

John Redwood looks at the market’s change in attitude to Covid-19 here.

Brexit/UK

The government released its negotiating objectives for the next phase of Brexit discussions. The UK aims for a relationship based on “friendly cooperation between sovereign equals” with both sides respecting each other’s legal autonomy. It will not abide by EU rules and states the UK “will not negotiate any arrangement in which the UK does not have control of its own laws”. Another red line is the UK’s refusal to accept any “obligations” to be aligned with EU laws, or the EU institutions such as the court of justice.

The government also said that it will decide in June whether to abandon talks with the EU and prepare for a no-deal Brexit on World Trade Organisation terms if no progress is made by June.

Economics

Helicopter money has arrived. Hong Kong will hand out cash to adult permanent residents, to help boost spending and help boost its troubled economy. As part of the annual budget, HK$10,000, around £1,000, will be given to about seven million people over the age of 18.

Geopolitics

Boris Johnson launched a review of Britain’s foreign and defence policy, as he seeks to redefine the nation’s national security position post-Brexit. The so-called “Integrated Review” will be the largest government-led review since the end of the Cold War.

Tensions between Turkey and Russia rose after an airstrike in Syria killed at least 33 Turkish soldiers, prompting President Recep Tayyip Erdogan to seek military support from allies in the West. Russia denied any involvement.

As the Democrats seek a candidate for November’s Presidential election, with primaries in South Carolina this weekend, Garry White argues that Donald Trump is now a moderate when it comes to China policy here.

IPOs

Meininger Hotels, a low-cost hotel operator, reportedly plan to debut on Aim next month in what will be the biggest listing for the junior market in the year so far. It will launch a £330m IPO towards the end of March, as it prepares to triple the size of its portfolio over the next five years to about 50,000 beds.

Food delivery service DoorDash said it had taken a first step toward a public offering in the US.

Fixed income

Bond markets were in ‘risk-off’ mode this week, with investors seeking the safe haven of core government bonds. As a result, yields on core government bonds fell across the board.

Technology

European proposals to catch up with the US and China in technology. It is focusing on taxing and regulation instead of encouraging competitors to Amazon, Google and Facebook. John Redwood takes a look here.

Energy

Oil was on course for its biggest weekly loss since 2011, raising speculation that OPEC and its allies will cut output to support prices. Brent crude futures were down 14% over the week by mid-session on Friday, trading at just under $51 a barrel.

Mining

Engineering giant Weir Group said it will focus on mining after suffering losses in US oil and gas. The company swung to an annual loss after taking a large write down on the operations, which are now up for sale. Weir said this made sense as there was rising demand for metals needed for batteries, as an alternative to fossil fuels.

Rio Tinto proposed a record annual dividend alongside its full-year results, with management noting that the strength of its “world-class portfolio and balance sheet” was helping it through the “current volatile environment”. Shares in the sector have been hit by the spread of Covid-19, as the economic impact on China of measures to prevent the spread, could hit demand in the world’s largest consumer of commodities.

Fresnillo and Canada’s MAG Silver revealed that underground mine production at their jointly-owned Juanicipio project in Mexico will start production ahead of schedule. However, it also said capital expenditure on the project had risen by 11.4% to $440m.

Healthcare

Trading in NMC Health shares were suspended after the embattled hospital operator fired its chief executive and revealed $335m of secret guarantees benefitting companies owned by two of its major shareholders. In addition to sacking boss Prasanth Manghat, leaving it with no executive board members, the company has also granted its finance chief extended sick leave as details of an investigation into its finances emerged. Shares in the group had collapsed after US short-seller Muddy Waters questioned its financial statements last year.

Financials

Reports suggested Barclays has now set in motion its search for a new chief executive to replace Jes Staley. The potential change of guard comes as City regulators look at links between Mr Staley and disgraced financier Jeffrey Epstein, who killed himself while awaiting trial on sex trafficking charges last year.

House builder Taylor Wimpey shares moved lower after management said that the squeeze on margins seen in 2019 will continue in 2020. Completions rose to a company record last year, but rising costs and stagnant house prices meant profit margins were lower.  

Retail

Shares in McColl's are slumped after it posted disappointing results, leaving it the worst performance on the FTSE 100 so far today. The convenience store chain also revealed it was in “advanced” discussion with its lenders to amend and extend its existing debt facility, and that an announcement was expected shortly.

Property

Countrywide and LSL Property Services said they are in talks over a possible merger which could create the UK's largest estate agency. The news comes after several years of losses at Countrywide and a difficult time for the sector. Countrywide owns the Hamptons and Gascoigne-Pees brands while LSL owns Your Move and Reed Rains.

Engineering

Rolls-Royce reported a 2019 loss of £852m after problems with its Trent 1000 engine overshadowed record engine deliveries at the company. The engineering giant has been plagued by problems with the engine since 2016 when cracks were discovered in blades on the engine’s turbine. However, its shares rallied in the absence of a further writedown on the issue.

Media

Shares in advertising giant WPP fell sharply after the advertising giant failed to deliver growth in the fourth quarter.

Walt Disney Co chief executive Bob Iger, who led the media company through several blockbuster acquisitions and the launch of a streaming network, is stepping down.

Revenues at publisher Reach saw its revenue fall by 5.3% last year on a like-for-like basis. This was a slightly lower fall than the 6.6% seen in 2018. The company, which owns over 150 brands including the Mirror, Express and Star, said revenue from circulation was “resilient” and that it had seen digital revenue grow 13.2%.

Consumer

William Hill beat its own expectations on full-year profit in 2019, despite the government rolling out a £2m betting limit on fixed-odds betting terminals. However, management warned of a possible £10m hit from an impending credit card ban.

Restaurant Group, which owns the Wagamama and Frankie & Benny's brands, will close up to 90 sites by the end of next year. The plan comes amid a tough period for casual dining chains, with rivals such as Jamie's Italian collapsing over the past year.

Space

Virgin Galactic said it will release more tickets for flights into space amid surging demand. Sir Richard Branson's company, which listed in New York last year, said it had received almost 8,000 registrations of interest for future commercial flights, more than double it revealed at the end of September 2019. The figures were revealed in Virgin Galactic's latest quarterly report, which showed a net loss of $73m. The shares are up almost 200% in the year to date.

Autos

Peugeot maker PSA Group revealed profits hit a record high in 2019, but the French carmaker predicted falling industry sales in Europe this year as it pursued its merger with Fiat Chrysler.

For more information please get in touch 020 3504 8307 or email us at madeforyou@charles-stanley.co.uk 

Garry White is Chief Investment Commentator at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.

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