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The Morning After

Following announcements from the leading Central Banks and governments, people are now reflecting on how the various schemes outlined will be translated quickly into action.

Empty floor and modern corporate buildings

by
John Redwood

in Features

26.03.2020

The G7 exchanges at the Foreign Affairs meeting revealed the continued hostility of the US Administration towards China and make a strained background to today's G20 video conference summit. On the agenda of the G20 is what the advanced countries can do to assist the health services of the emerging world, about to be tested by outbreaks of the virus. The countries will be invited by Saudi Arabia in the chair to discuss targeted health support, and wider economic and financial support. The emerging countries are feared to suffer more from the fall-out caused by the large contraction in world output now underway. Saudi Arabia herself, along with Russia, will also come under US-led pressure over the oil price war, which is further undermining capital investment and cashflows in an important sector. This has knock-on effects to banks and bond markets that have financed the shale revolution which Saudi and Russia are so unhappy about.

Meanwhile, after the big bazooka announcements from the leading Central Banks and governments which fired up the strong market rally, people are reflecting on how the various schemes outlined will be translated quickly into action. There are problems with government-led schemes, getting them defined and on websites, with enough resource behind them to allow large numbers of applicants and a rapid turn round. There are bigger problems with commercial bank led schemes, where the small print often leaves the banks at substantial risk and therefore inclined to insist on reworked business plans, personal guarantees and pledged corporate assets against the loans. All this is not quite the easy-to-obtain bridging finance for businesses the architects may have in mind. It leaves companies unable to guess what their income and cashflow will look like for the next few weeks at a disadvantage in getting money from one of these schemes. Many of them are now in shutdown and do not know when they will be allowed to trade again. Taking on a lot more debt is not a very attractive option. This applies in the USA, the Euro Area and the UK.  The Governor of the Bank of England in the UK wrote yesterday to all banks reminding them of the various schemes available. With his cosignatories, he urged the banks "to take all action necessary to ensure the benefits of the measures outlined above are passed through to businesses and consumers". The banks remain nervous about lending criteria in these difficult times, and mindful that the government guarantee only covers 80% of the loan and is only available after claiming any collateral or personal guarantees from failed borrowers.

Cash remains king in these circumstances for the wider corporate world. Many companies are closed down temporarily, and many others are struggling with much-reduced revenues. If we look at what companies are doing, we see them taking early and strong action to conserve what cash they have. Share buyback programmes will stop. Most capital spending that is not contracted will be delayed or cancelled. Dividends will not be paid. There is already a long list of companies that have announced no next dividend, with more businesses to come. Some companies will move to make employees redundant, whilst others in the US and UK will wait to see if the support schemes meet their needs. Some companies will stop paying rent and seek urgent talks with their landlords.

It is still difficult to get a clear view of what will happen to company earnings. Leaving aside the relatively few sectors like food manufacture, food retail, medical supplies, healthcare and online services that will do well, many will plunge into heavy losses with no revenue. Others that do have some offsetting business online or in essential work may still be lossmaking overall. It seems likely that the fall in earnings for the period of closures will exceed the current fall in the stock market. If the closures were to prove short-lived then markets would look through the temporarily higher PE to recovery. If it drags on as seems likely, the continuing loss of earnings then leads to higher borrowings, more fragile businesses and a greater incidence of financial reconstruction or bankruptcy.

The UK is examining a test for antibodies in the blood of people who may have had the virus. If this turns out to be a good test and can be rolled out in large quantities, it could help an earlier return to work for those who were revealed to have established some immunity to catching the disease again.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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