After my negative comments in a previous blog post on Friday about the short term prospects for share prices bearing in mind all the uncertainties that face us, there were several other commentators over the weekend who suggested the market was ignoring the realities. Too much exuberance in expectation of a quick recovery was a common theme. That may be why the market opened in a sluggish manner this morning when Monday morning is often a time when share prices rise after investors read share tips over the weekend.
What is really happening in the real economy is the key question? Just walking around the streets near my home it is clear that builders and home improvers have got back to work. This is also apparent in the trading statement issued by tool/equipment hire company Speedy Hire (SDY) this morning, in which I hold a few shares. Their revenue is only 17% down on the prior year for the last week, whereas it was down 35% in April. With aggressive cost cutting measures already taken, the “Board remains confident that the Group can operate within its existing debt facilities and covenant tests during a prolonged period of reduced trading activity”.
However the bad news is that the accounts have been delayed and they are investigating a claim against a subsidiary named Geason acquired in 2018. They are also writing off the carrying value of goodwill and the contingent consideration payable on that acquisition. It only represents c.2% of group revenues but they say it has not performed in line with management’s expectations. It looks like an acquisition that was unwise. It is probably no coincidence that the finance director is soon departing.
One indicator of investor confidence is of course the state of the housing market. When house prices are rising, investors feel wealthier, and when they are falling, confidence is undermined. Knight Frank reported a 2.1% decline in central London property prices in April and Nationwide reported a national 1.7% fall in May. That is not surprising though bearing in mind that the Covid-19 epidemic may have discouraged house purchases given the economic uncertainty and job losses. Will people really be buying houses when they have just been “furloughed”? In addition, estate agents have been closed and house buyers deterred from visiting properties by isolation restrictions. But in the real world, this may be rapidly changing. A neighbour of mine in our outer London suburb decided to sell her house recently. In just a few days she had a number of inquiries and there were several offers received in no time at all. She did lower the price somewhat as against what I would have asked, to achieve a quick sale no doubt, but it is clear the market is alive and well.
Retailers are getting back in operation – there have even been two new shops opened recently in our local High Street. But the travel and hospitality sector firms are furious about the new quarantine rules for visitors coming into the UK. They claim, perhaps rightly, that it will kill their businesses and they would have to cease trading. A group called “Quash Quarantine” claims the quarantine rules are unjustified and not based on any science, i.e. they are disproportionate. A “letter before action” has apparently already been submitted to the Government. Comment: This looks like shutting the stable door after the horse has bolted as checking incoming visitors and enforcing quarantine might have had some effect in the early stages of the epidemic in the UK but it will now have minimal impact. It surely makes sense to have some targeted restrictions (e.g. visitors from known “hot-spots”) and more checks/testing of visitors in general but a blanket set of rules with little chance of 100% enforcement seems very unreasonable. Otherwise the tourism industry will be destroyed at enormous financial cost, and the whole hospitality sector damaged.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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