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The Post Covid Picture

6 May 2020

The world is likely to be much changed once we finally reach the other side of the Covid chaos. Something of this magnitude will leave an indelible imprint on peoples’ lives, changing attitudes and behavioural patterns, certainly for a time and, who knows, perhaps permanently in many cases. I would think we will generally be a bit more “make do and mend”, bringing a pause to the throw-away society we have become. Nicer and more caring? For a while perhaps but those unpleasant qualities won’t be far away. There will, however, be some very tangible changes to the economy, few of them for the better.

Top of the list will be consumer behaviour. Many businesses are there to offer services that have, until now, enjoyed a sizeable and growing demand. That demand will be much smaller and will not sustain so many participants. Think restaurants and airlines. The former area was already overcrowded before the coming of Covid. The really telling time will come as society emerges from lockdown towards a more normal (whatever that turns out to be) economy. Massive loans to sustain businesses throughout the problems are still loans, not gifts. Repaying them from a business suffering a considerable hit to revenues will be hard. Many that survive the actual lockdown may not survive the recovery.

For many workers currently being furloughed that is likely to be as good as it gets. Once the government has stopped picking up 80% of the tab expect a wave of redundancies as businesses reassess their prospects in the light of radically changed consumer behaviour. The airline industry has already started, with British Airways earmarking 12,000 redundancies.

Expect many companies to rethink dividend policies in the wake of Covid. Many have cut or cancelled already but in many instances it will be a case of rethinking the whole basis of shareholder returns. Those that couldn’t really afford them have been given a wonderful opportunity to cease their unjustified largesse whilst prudent boards are likely to be even more so. The FTSE yield pre and post Covid are going to look very different.

Allied to this we can also expect a rethink about returning cash to shareholders via share buybacks. The Covid experience is likely to engender a rather less flamboyant attitude to company cash. Ironic that they will probably be taking the decisions to cease the buybacks at a time when their share prices are probably far better value than those at which they had previously been acquiring them.

Many companies have spent the last decade reducing and/or eradicating their pension deficits following the damage inflicted by the financial crisis. The damage is going to be inflicted all over again. With massively reduced dividend income and interest rates even lower, those deficits are due to swell once more. It is a grim thought but an increase in the mortality rate is the only thing likely to offer a degree of balance.


Market Outlook

 Having briefly breached the 6,000 level the FTSE 100 Index has slipped back a little but still sits about 17% above its March low point. The US markets, driven by the heavily weighted FAANG stocks, have rallied even further, with some big names calling that the corner has been turned. Warren Buffett, CEO of Berkshire Hathaway, aka the Sage of Omaha, takes the opposite view. He has exited the airline industry completely and sits on a cash pile in excess of $90bn. So who’s right?

I think I would lean towards Buffett, who has seen even more bear markets than me. Yes, a number of the cutting-edge technology stocks may be immune to some of the worst effects of Covid but not all, and even then, what is a sensible price to pay for such stocks. Multiples edging towards, and into, three figures in some cases, is mind-boggling.

Early on in this problem we looked for a short but deep lockdown induced recession and, on this basis, a V shaped recovery was not out of the question. However, as the lockdown has become extended and release from it is clearly going to be very gradual, so that V shape has progressed through the reverse tick shape and some are now expecting a U shape with a longish flat bottom. We think, yes, we have passed the worst but feel the recovery in the stock market has been too much too soon and, particularly in our own market, has been fairly indiscriminate. We regard Buffett’s stance, with plenty of cash at the ready, as rather more sensible than wading in across the board. Patience, as they say, is a virtue and the gloom will dissipate at some point. State control will be rolled back and those companies that survive will do so because they are well managed and will flourish and grow once again.


Russell Dobbs FCSI