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In this week's update, we discuss China's economy, the big banks, why oil crashed to lower than $0, the companies to watch this week and an update on furloughing.
China’s economy shrank for the first time since records began
China’s economy shrank last quarter for the first time since records of quarterly results began, back in 1992. China is the world’s second largest economy and has enjoyed many years of GDP growth, topping 15% in 2007 and 6.6% last year. However, in the latest quarter the economy shrank by 6.8%, compared to 6.4% growth in the same period last year. Factory output and retail output were both down due the lockdown, while unemployment hit an all-time high of 6.2% in February. China was the first country to introduce a lockdown due to COVID-19 and therefore is one of the first countries to start coming out of this. The economic data gives us indications of the impact that the lockdown could have on the global economy. However, the Chinese government’s economic rescue measures haven’t been as extensive as other leading economies, which could mean other nations come out of lockdown in a healthy position.
The big banks
Every quarter the results of the big banks tend to make the front pages of the financial news. With everything else happening, they haven’t been publicised quite so much, so here’s a quick round up of the key takeaways.
Bank of America saw a first-quarter profit slump of 45%, which caused their share price to fall 6.5%. A significant proportion of profits come from their consumer business (products for people wanting to save or get a loan), which is likely to take a hit over the coming months. CitiGroup is in a similar position and have put aside extra capital to cover the potential that more loans go unpaid in the upcoming period.
Goldman Sachs’ quarterly profits saw a similar decline to Bank of America, largely due to results in their asset management division - they are able to collect less commission if stocks decline and they manage less valuable assets. However, there are positives for the firm, as their bond division had a record high and their trading division increased by 28%. In times of turmoil, they will be offering more advisory services for businesses and earning off the trading they do.
Banks will make less income on their loans as interest rates in America and a number of countries in the world have been cut in an attempt to shore up the economy. However, this has led to many of them changing their portfolio mix. J.P. Morgan announced it would put more resources towards its trading division, which has been flourishing in recent weeks. The quarterly results were slightly worse than investors’ expectations, but they were somewhat reassured by the divisional breakdown of results.
In this update last week, we discussed oil prices declining to below $25 per barrel for Brent crude (the most commonly used benchmark for oil prices). In the last day, the price of Brent crude fell to a new 21 year low of approximately $20 per barrel, as supply has continued to be greater than demand. However, it’s been another index which has caught the headlines. The West Texas Intermediate crude (WTI crude) on Monday started trading negatively on the New York Mercantile Exchange - something that it's never done before and means that someone would have to pay to have the oil taken off their hands.
This price crash occurred because there is a physical delivery element to WTI Crude (unlike Brent crude), which investors weren’t sure would be met. The US benchmark oil contract (the WTI), was closing in on expiry date for the May delivery. The delivery gets made (usually without incident) and all future contracts are settled at this point. However, there was a worry on Monday that, due to COVID-19 causing less demand for oil, there wouldn’t be space for the new delivery. Those with the future contracts (liable for the oil until it gets delivered) panicked and started to rapidly offload their position, causing the price to crash below $0.
Questions to ask yourself... what are the priorities for the Chinese economy as they move out of lockdown? What can banks do to improve their prospects at this time?
Companies to watch
Oasis and Warehouse
Fashion retailers Oasis and Warehouse are the latest high street firms to fall into administration following the lockdown imposed as part of the COVID-19 crisis. The firm has 500 stores across the UK, and employs over 2,000 people - 1,800 of which have been furloughed as part of the government’s job retention scheme. The firm is now in talks with their administrators, Deloitte, to determine if the company can be sold.
Oasis and Warehouse are both examples of high street fashion stores that have struggled to transition to digital retailing and have suffered even more following the lockdown. According to the British Retail Consortium, retail sales are down by 25% year-on-year, the biggest decrease on record, and consumers that are buying have changed their habits. Internet sales now account for 44% of the retail market, up from less than 30% last year. On top of this there’s also been a shift in what people are buying, with computers, board games and fitness equipment sales all spiking as people spend on entertainment.
A number of firms across the world are supporting the fight against coronavirus by repurposing some of their output and machinery to help medical staff and hospitals. The highest profile example of this in the UK is the Ventilator Challenge UK consortium, made up of some of the country’s largest industrial manufacturers including Mclaren, BAE Systems, Airbus, Ford, Thales and Rolls-Royce. Their aim is to help produce over 10,000 ventilators for the UK, which currently has only 8,000 across the country.
The UK government has made a number of grants and contracts available for firms who are able to help assist them in hitting their target resource requirements for things like PPE and Ventilators. At the same time, a number of firms have additional capacity due to declining demand during this period, so are able to pick up this work.
It’s hoped this activity will help negate some of the effects of the international shortages caused by massive demand for these items globally.
KFC have announced they’re reopening a limited number of stores for deliveries only following closure after the lockdown was announced three weeks ago. 11 stores across the UK are opening and they join Burger King and Pret a Manger in announcing a limited return to service.
Deliveries to consumers through apps like Deliveroo and Just Eat have seen a number of smaller businesses and chains continue to generate revenue during this period, with other companies like Dominos reporting larger order volumes of orders than ever before. It’s likely a number of larger chains will continue to operate in cities across the UK, to continue generating revenue and provide a service to their customers.
KFC, Burger King and Pret are offering free meals or discounts to NHS staff, as they look to continue to support those on the front line with ‘affordable and accessible food’.
Consumer goods brand P&G has announced their biggest quarterly revenue uplift in decades, as consumers across Europe and North America change their habits in response to the coronavirus lockdown. They are not just seeing an uplift through stockpiling of essentials, such as toilet paper brand Charmin, but also across a number of consumer items. There’s been an increase in sales of washing detergents, dish-care products, and other cleaning items. With more time at home, consumers are increasing the time they’re spending on chores, as well as eating in more frequently as they’re unable to go out for meals.
Not all P&G brands have done equally well however - some of their cosmetic brands, such as Gillette razors, have seen a decline. Seemingly with fewer opportunities to socialise, people might be taking this as an opportunity to relax their grooming regimes.
The company’s results give an interesting insight into how rapidly consumers’ buying habits have shifted in response to the lockdown. They also show that despite some firms struggling in response to the economic impacts, some companies are emerging stronger than ever in the current period, with increased demand for their products and services.
Questions to ask yourself... which companies are in a position to do well when we move out of lockdown? What can retailers do to boost revenues?
The government backed employer retention scheme (see last week’s update) has been extended until the end of June as the government increases measures to protect jobs from the impact of COVID-19. The original end date for the scheme was 31st May, but as the lockdown period was extended for another three weeks, the government also announced this extension. The scheme offers a grant to employers to cover 80% of their employees wages (up to £2,500 per month), aiming to stop employers making redundancies during this time - early estimates show up to 10 million people could be furloughed.
The scheme was announced weeks ago, but Monday this week was the first time employers could formally apply for the support. On the first date, 140,000 UK companies submitted an application, covering around 1 million workers.
Question to ask youself... how can the government be supporting the economy at this time?