On both sides of the Atlantic, we’ve now been through the bulk of the first quarter earnings season. What have we learned from the results announcements? Here are seven key takeaways.
1. The main course is still to come. The first three months of the year only tell part of the Covid-19 story. In Europe and the US, the first six weeks of 2020 were very much BC - Before Corona. Not until the third week of February did we start to take the outbreak seriously. Only then did the economic impact start to be felt and it is clear that the second quarter will be when the real pain is felt. Of course, the stock market quickly tried to price in the inevitable downturn, but we will not have the full measure of the slowdown in activity until July, and even then we may not be much the wiser about the longer-term effects.
2. Not all created equal. The wide variation in results has underscored how the outbreak will create winners and losers. To take a few random examples: AstraZeneca, the pharmaceuticals giant, seems to have had a good crisis, with sales and profits higher than last year; ITV, on the other hand, saw an unexpectedly large fall in advertising revenues; Next showed that consumer confidence was vulnerable even before the Government issued its stay-at-home edict; Smith & Nephew, also announcing results today, is a company that may be a long-term beneficiary of higher healthcare spending but it’s been hit in the short term by the cancellation of non-emergency operations. Over the pond, Amazon is clearly a long-term winner, but it is also having to spend heavily to manage the impact of the outbreak. Apple proved that even technology stocks are reliant on global supply chains.
3. Live to fight another day. Attention has focused, in many cases, less on profits than on the balance sheet. For some companies, the issue is survival and the focus is on conserving cash and pulling through to the other side of the crisis. A key question here is the extent to which companies are dependent on short-term support from the government, for example via the furlough scheme whereby the Treasury is funding 80% of wages until June or July. For many businesses, the end of that life-support will mean some very tough decisions need to be taken. For the economy as a whole, though, it is important that we avoid keeping zombie companies alive, diverting resources from businesses that can survive and thrive in the AC world - After Corona.
4. Where did my income go? Throughout the post-financial-crisis era, shares have been a great source of income for investors, sustaining retirees, in particular, as they use their savings pots to fund a life after work. The need to conserve cash has put an end, at least temporarily, to those dividend streams. The key question is whether this proves to be a short-term hiatus, before payments resume next year, or a permanent drop in income.
5. Who’s buying? When the crisis first emerged in China, disrupting manufacturing supply chains, a widely held view was that the hit would be short and sharp, leading to a V-shaped recovery in activity once workers returned to offices, factories and shops. That view looks too optimistic now as attention shifts from the supply side of the economy to demand for goods and services. It now looks possible that the resumption of flights, the re-opening of shops and the renewal of global trade might not be enough to kick-start the economy if consumers lose the will to spend or businesses to invest. If you are worried about your job, a new car will seem less essential than it did, let alone that overseas holiday that requires getting on a plane in close confinement with other passengers.
6. Flying blind. There’s never been so much uncertainty about the outlook, for growth in the economy or for company earnings. That makes valuing shares very difficult and explains the big swings - down in February and March, up again in April. If recovery is reasonably swift and full then a few quarters going missing won’t make that much difference to the long-term value of a company or its shares. But that increasingly looks like a big ‘if’.
7. Marching to a different drumbeat. In the long run, stock markets track economic and earnings growth. But in the short term, they can diverge significantly. This is what investors mean when they say that the market is a weighing machine in the long run but a voting machine shorter-term. Over a period of years, share prices are determined by profits, over weeks and months sentiment is more important. During April, the market looked through the inevitable earnings hiccup in the second quarter. We will see how long that optimism can last in the face of tough economic news in the period ahead.
None of us has a crystal ball when it comes to the market. We don’t know who the winners and losers will be, how the economy will respond to the ongoing medical situation and what the impact will be on our investments. Not knowing what’s around the corner, the best approach is to ensure we are well-diversified (different assets and geographies) and remain invested through the inevitable ups and downs, with enough cash to hand to take advantage of any short-term volatility.
Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.