Good morning!
This is the placeholder for the SCVR, for your early comments.
On Sunday, the Federal Reserve cut interest rates to zero and announced a $700 billion QE program, alongside other measures.
The markets are taking it as a sign to get worried. US equity futures are currently trading limit down. We are primed for another week of volatility in the markets.
I'm a little overwhelmed with all of the news at the moment. It's hard to know where to begin.
To put some order on proceedings, here are the broad topics around which I'll organise this report:
- Macro news flow
- Airlines
- Leisure stocks
- Small-caps
These are exceptional circumstances, so I think it's reasonable to devote portions of this report to areas it would not normally cover (which Paul has been doing, too!)
Large Cap View - I have written another article with a large-cap focus, this time the headline is:
FTSE-100 Yields Go Through the Roof
It's fairly self-explanatory. Looking at the yields on offer in the FTSE-100, I examine whether there is some value to be had in the blue-chips!
Macro news flow - more pain for investors
I made some comments last week about Mark Carney's interest rate retreat at the Bank of England.
Central banks are coordinating their actions and now the US Federal Reserve has cute its main benchmark rate, the federal funds rate, to near-zero.
This is a huge rate cute of an entire percentage point, in one move. Unscheduled, emergency rate cuts in the past have typically been 50 or at most 75 basis points (i.e. 0.5% or 0.75%).
The radical announcement has been accompanied by other major new policies:
- The Fed is going to buy an extra $700 billion in Treasuries and mortgage-backed securities.
- The rate at which banks can borrow directly from the Fed has been slashed by 125bps, almost to zero.
- Bank reserve requirements are now zero, i.e. they don't have to keep a certain amount of customer deposits at hand and there is no limit to the amount they can lend.
- Cooperating with other central banks, the rate on international dollar "swap" loans has been lowered.
From CNBC:
The actions by the Fed appeared to be the largest single day set of moves the bank had ever taken, mirroring in many ways its efforts during the financial crisis that were rolled out over several months. Sunday’s move includes multiple programs, rate cuts and QE, but all in a single day.
My view
We've been in unprecedented monetary conditions for years, and the policies are only getting more extreme.
And while easy monetary policy has pumped up asset prices for years, the Fed, Bank of England and other central banks are now finding it more difficult to keep the music playing.
US equity futures are currently limit down (i.e. more than 5% down), despite this jumbo Fed announcement. Investors are reacting with horror this time, rather than with delight and/or acceptance.
Of course it's not possible to know what others are thinking, but the sell-off today could be the result of investors taking the view that:
- if central banks are terrified by the Covid-19 situation, then perhaps it's even more serious than the consensus.
- if loose monetary policy hasn't "worked" since 2008, it's unlikely to start working now and it doesn't offer a solution to financial problems.
- the disruption caused by Covid-19 is so enormous that equity prices are going to have to reset at a lower level, regardless of what central banks do.
On the third point, Chinese data published last night was truly awful.
As reported by the FT, Chinese retail sales in January and February were down 20% year-on-year. Industrial output was down 13.5%.
Analysts had been forecasting only minor pullbacks. Perhaps they assumed that China would massage the figures, to avoid publishing numbers like this?
Since trust in the reported numbers is still low, there may be suspicions that the real numbers are even worse than those printed above.
And as pointed out in the FT article, Chinese lockdowns started on 23 January. So the contraction in February is much worse than the numbers given for Jan-Feb.
The ripple effects from this will be huge. To give one example: Burberry (LON:BRBY) (in which I have a long position) is down 9% today. The missing Chinese buyer will be a huge blow in 2020.
And with Europe being the "epicentre" of the pandemic, according to the World Health Organisation, and lockdowns coming into force in European countries, the European buyer is about to go AWOL, too.
It's is a ghastly situation from a public health perspective, that's for sure. And since this is a financial column, it behoves me to state the obvious: that lockdowns are ghastly from an economic perspective. Lockdowns are certain to destroy many businesses, both large and small.
Airlines
I'm giving this its own section, since all of the airlines have published updates today.
Wizz Air Holdings (LON:WIZZ) (down 23%) - National travel ban in Poland
Yesterday, the Polish Government banned all foreign citizens from entering the country.
Wizz Air, the equivalent of Ryanair Holdings (LON:RYA) in Central and Eastern Europe, has therefore suspended all flights to and from Poland - 20% of Wizz Air's capacity.
Wizz reiterates that it has a €1.3 billion cash balance, which it thinks will allow it to trade through this crisis.
Ryanair Holdings (LON:RYA) (down 19%) - Urgent action to respond to Covid-19
Ryanair paints an exceptionally bleak picture of what is happening in the short-term.
It expects the grounding of the majority of its aircraft fleet across Europe over the next 7 to 10 days.
And it says even where the fleet is not grounded, "social distancing restrictions may make flying to all intents and purposes, impractical, if not, impossible".
Seat capacity will be reduced by up to 80% for April and May, and "a full grounding of the fleet cannot be ruled out". There has been "a substantial decline in bookings over the last 2 weeks".
Like Wizz Air, Ryanair has a big cash pile to help it through difficult situations, though it could hardly have anticipated a situation as bad as this. It has €4 billion to play with.
Easyjet (LON:EZJ) (down 22%) - Covid-19 Update
Like Ryanair, Easyjet is blitzing its cost base to help it through this crisis. And it has a £1.6 billion cash balance, plus an undrawn $500 million facility.
It withdraws guidance for this year - that almost goes without saying.
It sounds glum about whether the aviation industry can withstand this situation, and hints at the need for government bailouts:
European aviation faces a precarious future and there is no guarantee that the European airlines, along with all the benefits it brings for people, the economy and business, will survive what could be a long-term travel freeze and the risks of a slow recovery. Whether it does or not will depend significantly on European airlines maintaining access to liquidity, including that enabled by governments across Europe.
International Consolidated Airlines SA (LON:IAG) (down 23%) - IAG's actions to address COVID-19's impact
Challenges in long-haul are a little different to short-haul. Chinese travel has been suspended, Asian capacity has been reduced, and President Trump's ban on European travellers has created "uncertainty" (sounds like an understatement) on North Atlantic Routes.
For April and May, capacity will be reduced by a shocking 75% (almost as severe as Ryanair).
Veteran CEO Willie Walsh is delaying his retirement to help IAG deal with the challenge.
My view
It is trite to say "avoid airlines", but that is what I have studiously done and will continue to do when it comes to my personal portfolio.
To be more helpful, I do think that some of these airlines can survive. However, it will depend very much on their ability to cut costs and to withstand temporary losses.
We saw with Flybe that it fell to pieces as soon as demand dried up. That was a very weak airline, but the majors will have the same fate if their cash balance can't take a beating for the duration of this episode. Most of them do have strong cash positions, for now.
Labour relations might also turn out to be very important - will trade unions allow the wave of redundancies and reduced pay and conditions which is going to hit their members at airlines?
Government help could also turn out to be critical, for example a relaxation of air passenger duty (APD) in the UK would be a terrific boost to domestic air travel.
More explicit government help in form of subsidies or bailouts is hard to imagine unless shareholders are taking a loss or putting new money in. So I definitely wouldn't count on that to save my equity position in any of these airlines.
Leisure
A quick word on the leisure sector.
Within this sector, I own 888 Holdings (888) which I reasoned would be ok due to A) having a cash-rich balance sheet, and B) being an online-only operator, so it's not affected too much by people staying at home.
Despite this terrific reasoning, 888 shares have halved this year.
It could be worse, though.
The Travel & Leisure Segment (click the link to analyse it on Stocko) is being absolutely decimated today. The airlines are doing very well in comparison to some of their peers in this sector.
The stand-out underperformers are:
- FirstGroup (LON:FGP) down 47.5% today
- Marston's (LON:MARS) down 43.8% today
- Restaurant (LON:RTN) down 40.1% today
- Cineworld (LON:CINE) down 37.5% today
- Mitchells & Butlers (LON:MAB) down 32.6% today
If people aren't leaving their homes, if sports events are being cancelled, and if personal incomes are under pressure from the contraction in economic activity, it makes sense that the Travel & Leisure segment (which includes the sports bookmakers) will be hardest hit.
Many of these are shares which I would avoid anyway (trite, I know). But there are surely going to be a few bargains here now, if normality returns later this year and their balance sheets survive?
Right, it's time now to cover some small-caps.
These have popped up on my radar today:
- Finablr (LON:FIN)
- Laura Ashley Holdings (LON:ALY)
- Dialight (LON:DIA)
- Big Sofa Technologies (LON:BST)
3pm: Finished the report. This is as far as I got.
Finablr (LON:FIN)
- Share price: 11.03p (suspended)
- No. of shares: 700 million
- Market cap: £81 million
Suspension of listing and directorate change
It's hard to believe that until recently this company, along with its sister NMC Health (LON:NMC), were both members of the FTSE-350 Index.
NMC Health looks like a probable zero, and Finablr has been racing behind it with some horror RNS announcements of its own.
Both companies were floated by the Indian-born businessman Dr. BR Shetty, and are based in the UAE.
This latest announcement is not quite the death knell for Finablr investors, but it's close.
- Due to a lack of funds, Finablr can't provide certain payment processing services (not a good look for a group of payment processing companies)
- third parties benefited from cheques written by Finablr companies prior to its IPO, to the tune of c. $100 million. The Board has only just discovered the existence of these cheques.
- "material uncertainty about the Group's ability to continue as a going concern" - no surprise.
- The CEO decides that now is a good time to leave. He is thanked.
NMC Health turned out to be a scandal-ridden mess, to an extent that is scarcely believable. In its most recent update, it disclosed that it discovered $2.7 billion in debts that it did not previously know that it had. It also disclosed that some of these borrowings may have been used "for non-Group purposes", i.e. for third parties.
Finablr is now discovering something similar, i.e. that third parties (connected to whom, I wonder?) have been taking money out, and that it might be going bust imminently.
Shocking that these companies made it into the FTSE-350 in the first place.
Laura Ashley Holdings (LON:ALY)
- Share price: 1.2p (-8%)
- No. of shares: 728 million
- Market cap: £9 million
Mixed fortunes here and I suspect that this story is approaching its final chapter.
The retailer reports some very good trading trends, although like-for-like retail sales are notable by their absence:
During the six weeks to 7 March 2020, total sales were 27.7% ahead of the equivalent period in 2019 and gross profit was 22.2% up on the equivalent period, ahead of management expectations.
Unfortunately, more funding will be needed for working capital. And Laura Ashley doesn't currently have access to any further funding. The lender (Wells Fargo) is only happy to extend £5 million, which is already drawn down.
I noted last month that ALY's debt position was improved by a very substantial reduction in year-on-year inventory. Today's announcement is basically a confirmation that the working capital reduction was only temporary.
The main shareholder is "actively considering" a £10 million facility for ALY, and another lender is discussing a potential £15 million facility.
Thisbit sounds ominous:
If the Group is unable to secure commitment for the requisite level of funding by the end of March to satisfy its ongoing working capital requirements and turnaround plan, then the Company will need to consider all appropriate options.
My view - the positive trading update provides a glimmer of hope, but I don't see much of a future for ALY shareholders. I'd rather be a landlord or a creditor for Laura Ashley, because at least then I could see myself getting some kind of a return.
Dialight (LON:DIA)
- Share price: 174.25p (-19%)
- No. of shares: 32.5 million
- Market cap: £57 million
A nasty loss from this LED lighting company. Even the "proforma unaudited operating profit" isn't very good, down 35% to £5.2 million on reduced sales.
Let's skip ahead to the full-year guidance for 2020 and see if there is anything positive.
Most of our end markets are likely to remain challenging short-term, exacerbated by the possible impacts of the COVID-19 virus. Nonetheless, in 2020 we continue to target a materially improved trading performance, with a strong focus on sales and new product development, and again with an H2 weighting and we expect a significant reduction in our year-end net debt.
Net debt finished 2019 at £16.5 million.
My view - struggling to find any positives. The gross margins aren't terrible at 37% but operating margin has been unimpressive for years. The manufacture of LED lighting solutions doesn't look or sound very "moat-y".
Big Sofa Technologies (LON:BST) - suspension.
This little tech company raised money last year.
It has enough money to survive only until May 2020, and failed to raise money last week due to "current market turbulence".
Since it doesn't know what it's going to do next, the directors have requested a suspension of trading in the shares.
The Directors are therefore exploring strategic options which may include a sale of the business...
One of the things about a bear market is that it makes it much harder for fundraisings and IPOs. Put simply, there are fewer investors around who are willing to chuck money at loss-making companies.
If the money on AIM has dried up, this could be headed for a zero.
Out of time for today.
The S&P and the Dow are both down around 8%, while the FTSE is now down 5% at 5050.
A strong mindset would be needed to buy shares today. I would do it but I'm fully invested, and have to sit tight. It's a very unpleasant rollercoaster at the moment!
Paul is with you again tomorrow.
In the meanwhile, don't forget to check out my Large Cap View.
Cheers!
Graham
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