Heading for catastrophe
AmONG the most shocking aspects of the coronavirus pandemic is the unprecedented impact on global economic conditions.
A day which started with a degree of optimism due to a surge in a Chinese manufacturing index in march, suggesting there could be a sharp ‘V’ shaped recovery from global lockdowns, ended with more alarming data.
In spite of the $2 trillion rescue for the uS economy, Goldman Sachs predicts a collapse of about 10pc, if calculated as the uK measures it, and a jump in the unemployment rate to 15pc.
The business sentiment indicator in the eurozone had its worst month in history in march. Global energy markets are in total disarray. They are being buffeted by a fall in world demand, with trader Trafigura forecasting a 30pc plunge as a result of the coronavirus shutdown in the West.
On the supply front, the stand-off between Saudi Arabia and Russia continues, leaving benchmark Brent crude at $26 per barrel. In the uS on monday, oil from the shale-rich Permian Basin of West Texas was changing hands at $10 a barrel, its lowest price since 1998. under normal circumstances motorists in Britain might be celebrating. But as the Government and police seem intent on stopping people from using their cars, it’s unlikely anyone, except delivery drivers, will notice.
Western governments have taken bold steps to prevent the pandemic from engendering total economic collapse. If the eurozone could agree on an overarching package, instead of the prosperous northern countries playing hard ball with the stretched southern nations, it might help.
But even with a Chinese rebound, the odds the world and Britain can emerge from this health earthquake with jobs and incomes intact is retreating fast.
Payout pressure
THE great dividend cancellation fever goes on with Britain’s biggest banks, Glencore,
Smiths Group and marketing giant WPP cancelling distributions. That means that among the FTSE 100 elite, 19 companies responsibly have conserved more than £12bn of cash.
In spite of the ever- shrinking oil price, Shell is not joining the crowd as yet.
One sector which should not be paying dividends is the banks. In this time of stress, when loans and credit are essential to keeping commerce alive, they should be pushing every lever to preserve capital.
That also means suspending bonuses in the boardroom, although there might be a case for frontline staff – who are working hard to keep financial services going – to receive some incentive payments when conditions improve as a reward. Provided, that is, they stop trying to seize entrepreneurs’ personal assets as security for loans. The Institute of Directors reminds us the public doesn’t want to see share buybacks and ‘large executive incentive awards’ at such a fragile time.
The impact of Covid-19 on advertising is unremitting. WPP shares were down almost 20pc before the current trauma and a further 50pc since, before responding well to the dividend cut and restructuring.
But the world’s biggest marketing group warns that the virus has delivered a bigger shock than the financial crisis with many companies axing advertising budgets.
Chief executive mark Read has a tanker to turn around if and when demand does recover, and there are real questions as to whether he has the schmoozing ability of predecessor martin Sorrell, who famously knew how to stroke the egos of CEOs and chairman. There are even suggestions that in the autumn WPP could be a sitting duck for a private equity take-out by KKR.
Companies that revolve around creative people such as WPP are the backbone of the uK services-dominated economy and it would be devastating if the pandemic were to lead to the talent pool being drained.
The sharp dip in the economy and a devalued pound are not an excuse for mortgaging the country’s future.
Radioactive juice
THE battle against the dreaded virus is boosting demand for orange juice.
Bloomberg reports that concentrated orange juice – viewed as good for the immune system – is the best performing commodity this year, rising 25pc to $1.214 a pound on the New York markets. ‘It’s a bit like toilet paper – plenty around but people have been rushing to buy,’ said one trader.
Remarkably the other commodity booming is uranium. With several key mines out of action the price has jumped 14pc in the last couple of weeks with operators of the 442 nuclear reactors across the globe seeking to secure supplies.
Strange bedfellows.