As dead cat bounces go, though, Monday was more of a twitch. The FTSE 100 index, having fallen 11% last week, regained just 1.1%, even as central bankers around the world lined up to echo the US Federal Reserve’s line about acting “as appropriate”. Share prices did better in the US during London hours, but it would be ridiculous to say the market’s mood has improved definitively.
The problem for investors struggling to feel where “fair value” might lie in a post-coronavirus world is twofold. First, monetary measures are of limited use in tackling a economic shock caused by the spread of a virus.
Cheaper money can alleviate cashflow problems and prevent the collapse of some healthy companies, which is clearly a goal worth pursuing. But, in the current circumstances, lower interest rates probably won’t perform their traditional role of encouraging investment and consumption. Sometimes companies just need their supply chains to start working again.
Thinktank Capital Economics looked at four occasions when the US Federal Reserve has cut interest rates in response to a specific event. Share prices rebounded each time in the following days, but the effect tended not to be sustained.
The S&P 500, the main US index, regained its previous peak within 12 months only on one occasion – after the failure of the LTCM hedge fund in 1998. It didn’t happen the other three times – after Black Monday in 1997, the 9/11 terrorist attacks in 2001 and the collapse of Lehman Brothers in 2008.
The second problem is estimating the size of the economic shock from the coronavirus. The OECD, as it cut its central global growth forecast from 2.9% to 2.4% this year, implied part the China-related element of the economic hit is irreversible. But it also said it could cut its forecast to just 1.5% in the event of “a longer lasting and more intensive coronavirus outbreak”. In economic terms, the range of possible outcomes is vast.
In the medium-term, one can speculate about how governments will try to re-ignite growth once they’re brought the viral outbreak under control. If spending is super-charged, the desired V-shaped recovery still seems possible. That, though, is for the future. At the moment, G7 finance ministers are merely in talking mode.
Supermarket sector could offer knives worth catching
Here’s a brave analyst, though. “Catch the falling knife,” advises Bruno Monteyne about the supermarket sector, observing that share prices have fallen a long way and people will keep eating.
Yet Monteyne’s description on what could happen to food retail operations during a pandemic – informed by his years as a Tesco supply chain director – sounded alarming.
Supermarkets would move to “feed the nation” status and might have to deal with panic-buying turning into “food riots”. The cost of the exercise, conducted with reduced numbers of staff, could wipe out a quarter of a year’s profits.
After reading this vivid description of organised chaos, it was an effort to remember this was a “buy” note. That, though, is the point: three months of lost profit would not be a heavy price to pay if normal trading resumed thereafter. Food retail is still a defensive sector.
Epstein fallout distracts from Bramson’s Barclays bet
If you call yourself an activist investor, you’re obliged to look active, and here comes Edward Bramson’s latest broadside at Barclays: a demand that the board reverse its “extremely ill-advised” support for chief executive Jes Staley, currently under fire for his relationship with Jeffrey Epstein.
Bramson’s letter will generate more attention than his recent trawl over Barclays’ returns in investment banking, but, in the end, one suspects its impact will be about the same – roughly nil. Most Barclays investors, surely, will wait for the outcome of financial regulators’ investigation into how Staley characterised his relationship with the sex offender who died in jail last year.
Anything less than 100% vindication will be fatal for Staley – and probably also for Barclays chairman, Nigel Higgins, since the inquiry also covers the bank’s own description of relationship. But, if Staley, Higgins or both depart, it won’t be Bramson’s doing. It will be the regulators’ verdict.
Bramson may be trying to look busy to distract from the other story here: his terrible bet on Barclays in the first place. He needs the bank’s share price to improve by about 50% just to break even. Investors in his Sherborne vehicle will be wondering (not for the first time) why on earth he didn’t pick a smaller and softer target.
