Today, as we experience it, the biggest economic slump in living memory has not yet triggered an equivalent stock market crash. Amid the life-threatening cardiac arrest of the world’s industry, the Standard & Poor’s stock market index, comprising the biggest US enterprises, has dropped only 13 per cent.
In quite surprising ways the fallout of the COVID-19 pandemic has created winners and losers and we are still puzzled why some companies seem immune to this new economic disease while others have to be kept on life support, or have already fallen victim to the virus.
We retail investors have to face a vexing situation: both victors and defeated are way too expensive to be viewed as a buying opportunity; it is difficult to predict the long-term effects of governmental and central bank rescue programmes; and many a fate is still uncertain, obscured by the absence of hard data.
Stocks which have lost enormously already, like airlines, tour operators or hotels, will not escape their distress any time soon. The question is not so much how much they will earn in future, but whether they survive at all.
Companies that demonstrate how to thrive during the crisis (some reaching all-time-highs), like Amazon and Netflix, or pharmaceutical businesses like Roche, Johnson & Johnson or Pfizer, even consumer staples producers like Procter and Gamble, can be expected to have a more pedestrian life once the virus is under control.
Firms that would have appeared to be logical winners of the lockdown, like delivery companies and catering services, were confronted with unexpected handicaps. Some could not cope with the sudden surge of orders; others had to struggle with their own workers falling ill with the virus or with hiring bottlenecks.
News organisations and telecom, both very much in demand, were crippled by the sudden drop in advertising income.
Many ‘defensive’ stocks, bought by investors in times of crisis, had to face supply and production disruptions and have a hard time adapting to radical changes of consumption patterns. Coca-Cola certainly profited from increasing home deliveries, but was hit much harder by the closure of fast food joints and the worldwide cancellation of sports events. Its own restaurant businesses, outlets like Costa Coffee, went to zero.
One would have assumed that people do not eat less at home than they do in restaurants. Yet they eat differently. Food suppliers and agriculture have suffered badly from restaurant shutdowns. What is delivered to a restaurant differs widely in quality, quantity, appearance, ripeness and packaging from food in supermarket shelves. As a result, shameful quantities of high quality food had to be destroyed or given away for free.
While shares in Daimler, VW, Ford, GM and other car makers suffered steep losses, Tesla stock is trading near all-time highs
Dairy producers and meatpacking businesses are suffering demand shocks because they couldn’t change tack quickly enough. Tyson Foods, the world’s biggest pork supplier, has lost a third of its stock market value; Smithfields in the US, owned by China’s WH Group, suffered similarly.
While everyone seems to be producing respirators, gloves, and protective garb these days, which will, in all likeliness, end up in storage, and others are frantically announcing progress in vaccines and treatment, some have found more inventive ways to make a living in times of lockdown. A Viennese company producing snow globes as souvenirs and Christmas gifts is offering a ‘loo roll globe’ now, which proved a roaring success. Orders come in to the tune of 1,000 pieces per day – quantities they would earlier have struggled to sell in a month.
While in 2009 all shares dropped more or less in tandem, and relentlessly, today’s relatively moderate index losses obfuscate what are wildly divergent stock price performances.
Nowhere is this more apparent than in the car industry. Home-locked, we drive hardly at all now, and hence see no need to buy a new car, even if dealerships were open. Factory shutdowns are not merely a health precaution, but an economic necessity.
Many of us have taken our cars from the road to save insurance, have terminated leasing contracts or decided to even sell our used cars. In such a scenario one would assume that all car manufacturers will suffer equally. Not quite. While shares in Daimler, VW, Ford, GM and other traditional car makers have suffered steep losses, Tesla stock is trading near all-time highs. Investors seemed to have picked a lone winner in the crisis.
This is not only due to Tesla’s technological lead in e-cars – by some industry pundits considered to be a six-year-advance – but also due to the nexus of legacy car makers with car finance and rental. Most cars these days are sold through leasing arrangements, which suffer when consumers struggle to make payments. Cars are returned ahead of schedule, haemorrhaging the used car market as no one is ready to buy, neither cab drivers, nor households. Car rental companies, a business now frozen in time, have no interest in taking on new fleets. They are sellers too in an already exhausted used car market.
Also, many car companies have stakes in mobility or car rental businesses, like Volkswagen, 100 per cent owner of Europcar. Both mobility and finance subsidiaries of car companies are accumulating losses squared by both payment defaults and asset revaluations. No wonder they are joining pilgrimages cap in hand to their respective governments.
What started as a supply crunch, and has manifested itself now as a demand collapse, may well end as a financial crisis. Banks, which did not cause the crisis this time around and which are much better capitalised than during the Great Recession of the noughties, are nevertheless again in the thick of it, with share prices down by 50 per cent on average. Radical, early loan provisions have halved current earnings of US banks. Most will suspend dividend payments ‒ if not by necessity then at least to avoid reputational risk. Twenty per cent of US consumers have stopped servicing their credit card debt, with a further 30 per cent not using their plastic.
Retail outlets, real estate developers, hospitality businesses, manufacturers, mortgage and credit card customers ‒ most bank clients, to put it bluntly ‒ will struggle to service their loan obligations. Nudged by governments to help ailing businesses with leniency, or with new government-sponsored credit facilities, banks would rather pretend than give a hand.
In my next column I will look into the effects of falling oil prices, which in the US have turned negative for the first time: on Monday last week, in the absence of buyers, recipients of crude oil for May delivery were willing to pay $40 per barrel to anyone ready to take it off their hands.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com
Andreas Weitzer is an independent journalist based in Malta