Alpesh Patel, who is CEO Praefinium Partners and a former Visiting Fellow in Business, Oxford University – gives his analysis of the current US economic situation.
Where We Are
As I write the US and UK Governments are making available trillions of dollars to businesses and individuals. Sadly, the tap is open but the pipe to deliver the money may be broken. SMEs are complaining they are not getting the money they need from banks.
My fear is telling banks they must lend isn’t going to work – the bankers are well aware when the dust settles, they will be under fire for making bad loans and fired for the same.
My other fear is that this crisis lasts longer than anticipated and pent up demand for our hotels, flights and restaurants will be too late to save many.
Whilst all UK businesses should check out Business Interruption Loan Scheme, the speed of processing, eligibility gaps, and simply some businesses making people redundant when they could have had financial support, are all worries.
Let me turn from the economy to the financial markets and the largest companies in the UK and US, which we can use as a barometer where we have more data than we do for private businesses.
Why It May Be Short Term
According to Goldman Sachs the average decline for an event-driven market decline is 30% and the duration is about 9 months. Of course since the Covid-19 crisis, from peak to trough, it has been much sooner. The average time to recover they say, based on an analysis of bear markets since 1900, is about 18 months.
Could we have the much desired ‘v’ shape recovery? Bear markets tend not to be V but W. They can rise, as we have done into technical bull territory, before the second leg drops below the first.
For the US markets that could mean a fall to below 18,000 (15% more) and for the FTSE 100 to under 4,000 (more than 20% lower than levels as I write).
Let us recall the Financial crisis saw the US markets fall 54% from their peak and they took 48 months to recover from their bottom.
And then there is oil
The oil war between Russia and Iran is really about America. The desire to flush out the American shale market for one thing by the Russians.
The economic damage to that industry and the companies around it will add to US economic problems. As for the benefits of cheaper fuel and energy costs – for consumers losing their jobs countrywide, the positive benefits are marginal.
Add to all of this, the economic problems in the Middle East, with the blockade of Qatar by UAE and Saudi Arabia and you see why OPEC itself is a weakened force and Russia’s alliance with it is something the latter felt it could disregard.
We see in the West why actually a stronger OPEC would be beneficial. If the Middle East cannot unite over this – there really is no hope.
There may be inward UK investment – sort of. We should not be surprised with USDGBP also having taken a hit, partly for the level of UK spending to GDP, but also a stronger safe haven US dollar, to see FTSE 100 companies, debt-ladened in some cases – looking even cheaper in US prices – to face a slew of take over bids -maybe from China where the Shanghai index is not even down 10% this year.
Take those companies with low Altman Scores (a measure of working capital and likelihood of bankruptcy) – Carnival (-75%), IAG (-65%), Melrose (-61%) and that’s in GBP terms, even cheaper if you’re a Dollar buyer.
Of course for private investors, there is the simple arithmetic that should a company return to where it was 3 months ago, and it’s dropped 90%, then the make a ten-fold return on their money. Great, even if that 3 month fall takes a decade to recoup, let alone a year. Of course some such companies will not survive despite immense government grants and loans.
There is also the positive news that some companies are actually doing well – as a measure of their share prices – Polymetal, Pennon, Fresnillo, Hikma all up in the UK and in the US – Citrix, Netflix, Gilead are all up 15%+ in the past 3 months.
None of this of course holds any joy for the millions seeking unemployment benefit, the SMEs which will fail and the huge debt burden after all this is over.
Whilst we pray for a sharp recovery in personal consumption, the danger is, it is again, like after the financial crisis, a long slow grind. The difference this time, to end on a positive note, the money is not going to a few banks, but to virtually everyone – eventually.