Coronavirus and the impact that the pandemic is having on all areas of life continues to be almost exclusively the focus for the business press at the moment. With this pandemic, the health and wellbeing of people will always be the most important consideration, but this update will focus on the business world to help you stay in the loop and build commercial awareness.
The last six weeks has seen a lot of market volatility across the globe as investors have responded to the current COVID-19 challenges and the worries surrounding the longer term prosperity of the economy. The FTSE 100 saw an 11% drop on a single day (12th March) and hit a low of 4,993 points later in March (for context, a month earlier, it was tracking at 7,400). Uncertainty over future economic performance will always lead to falls in stock markets, and the level of activity across the global as a response to COVID-19 has wiped trillions of pounds off the biggest companies.
There has been some positive news over the last two weeks in the markets as they start to bounce back from the crash - at the time of writing the FTSE 100 is back to 5,800 points. This is largely due to confidence being instilled through government initiatives offering businesses more certainty. For instance, the American markets rebounded on news of the £2 trillion stimulus package passing through Congress and, in the UK, the more domestically focused FTSE 250 responded well to Chancellor Rishi Sunak’s announcement of support to businesses during the crisis. Some stocks have done worse than others, with airlines, insurance and energy firms all being hit hard. On the flip side, supermarkets, workplace technology firms and online retailers have seen their stocks rise, as they have been able to adapt easiest to the lockdown conditions. As investors look for safe investments, there has also been increased demand for gold and government bonds.
Moving away from stocks, oil is another market which has experienced difficulties in recent times. With consumers travelling less and businesses curtailing activity, there’s significantly less demand for oil. With the same amount of supply and less demand, this has caused the price to crash - brent crude was trading at less than $25 per barrel at the end of March, compared to $65 per barrel at the start of the year. In the last few days, OPEC (The Organization of the Petroleum Exporting Countries) and Russia all agreed to limit supply in an attempt to encourage the price to inflate. This has appeared to have some impact with brent crude currently trading at over $31 per barrel.
M&A and capital raises
Mergers and acquisition (M&A) activity has hit its lowest levels since April 2009 as companies put deals on hold in the face of financial uncertainty. Overall $698bn worth of M&As have been completed globally in the first three months of the year, down by ~$300bn dollars on the previous year.
The decrease in activity is again being caused by the financial uncertainty in the market. Companies are often committing significant amounts of cash to acquire or merge with another firm and many companies are thinking twice before completing the deal. In some instances firms may be looking to protect their own cash reserves and not overcommit during a challenging time, however there may be other companies that could be stalling on a deal in the hope of securing a reduced price.
As we’ve seen above the economic implications of COVID-19 still aren’t fully understood, and as a result the majority of firms are acting more conservatively in their investments.
Questions to ask yourself… Is it a good time to invest in the stock market? What can companies do to support employees and the global effort to tackle COVID-19?
In the past month, the state influence on business has been more apparent than any time since the Second World War. The British economy since Margaret Thatcher started her reign as Prime Minister has favoured an approach which allows private business to flourish, with limited state involvement. In response to this current crisis the state is in effect bankrolling the economy to ensure it weathers the storm and can return to prosperity shortly.
One way which has been a focus for the media is the so-called furloughing of employees, or what is officially the government-backed employee retention scheme. Within this, the government has allowed businesses to claim back 80% of employees salaries (up to £2,500) from the government if they become surplus to requirement up until 31st May. The scheme aims to protect people’s jobs who would otherwise face the prospect of redundancy, especially in industries impacted by enforced closure (bars, shops, gyms, etc.). This scheme appears to have widespread usage across industries and the latest estimate is that nine million will be furloughed - if this is the case, it will cost the government around £30-£40 billion in the three months it’s currently in place for.
Furloughing is a short term measure to support during the worst of the crisis, but the government will be turning their focus on how they can drive economic performance as we start coming out of the other side. Commentators currently predict that the economy’s growth could shrink by one-third if lockdown lasts for three months. Keeping people in jobs after this point and ensuring money is in the economy, both in terms of consumer spending and investment, will be pivotal as the country aims to bounce back from the current challenges. However, the government has to balance how much it can support these aims, with the amount of debt it can reasonably take on in the short-term. Health is of course the main priority for spending, but it will be interesting to see how far the government goes to support the economy during this time.
Questions to ask yourself… if you were in Rishi Sunak’s shoes, what would you be doing to support business during this time?
Companies to watch
Whilst there’s stories all around us of the challenges being faced by companies across sectors in the face of the COVID-19 outbreak, there are a number of companies that are seeing a boost from the lockdown and social distancing measures enacted by governments around the world.
It’s of no surprise that some of the biggest successes are companies set up digitally, and either facilitate remote working or remote communication. Video calling service, Zoom, has become ubiquitous during the period, with businesses relying on it to communicate with each other, as well as individuals using it for personal calls to keep in touch with family and friends. Zoom’s share price has risen over 100% in the period and is one of the best performers in this sector.
With government advice keeping people indoors, Amazon has seen a huge increase in demand with consumers having to order online if they can. This has seen them already take on over 100,000 new workers for their delivery centres globally, with a further 75,000 announced as demand continues to increase. Despite concerns over worker safety, Amazon has seen order increase and this has seen their shares rocket 20% during the period.
Supermarkets have seen a massive boost in sales following the coronavirus outbreak, with customers shopping more frequently, as well as stocking up on more when they shop. This has seen March 2020 rank as the biggest ever month on record for UK supermarkets, even beating December, which is by far and away the biggest month traditionally. The majority of this growth has been triggered through the uncertainty surrounding the stability of the supply chain which drove a lot of people to stockpile and panic buy in the early weeks. Starling Bank has reported supermarket transactions peaked 2 weeks ago, potentially signalling an end to the panic buying as consumer confidence returns.
Finally I’m sure it comes as no surprise to any of you (myself included) that streaming services such as Netflix, Now TV, Disney+ and Prime Video have all seen increases in users during the lockdown. Netflix app downloads increased by 57% during March, their fastest growth rate since 2016, and the other streaming services are following suit with increases of their own. Whilst these firms are tight lipped over their viewing figures and data, it’s likely more time is being spent on these services than ever before, leading them to a rush to bring out more content during this period.