The exit path from the lockdown of pubs is likely to be precarious, write John Hattersley, chairman of the CAMRA Members’ Investment Club
As March progressed it became increasingly clear that Coronavirus was making 2019 look like ancient history in a very short space of time. It was posing a significant challenge to the way the world functioned and, notwithstanding the human trauma of the immediate health threat, there would be a longer-lasting impact on the global economy. With businesses and individuals self-isolating, supply and demand began to fall simultaneously at precipitous rates. That is why March 2020 was the worst month for the FTSE All Share Index in 19 years.
The shock ripping through the business world is daunting, but the duration of the economic standstill will be governed by epidemiology and the response of governments to it. In the UK the extensive emergency support announced to date is aimed at reducing a sharp rise in unemployment as many companies effectively experience a period of zero revenues. The measures appear to be a having a positive, if delayed, impact, although the long- term cost to the taxpayer will be enormous and their efficacy will depend upon the ultimate length of the business shutdown.
Many business models are being tested to their limits and the need for balance sheet strength and liquidity has rarely been more at a premium. With businesses prioritising cash preservation the dividend outlook for 2020 is very uncertain. The number of deferred or cancelled dividends, including many already declared, is extensive and climbing. It is to be expected that more companies will follow this route, especially those who are receiving government support. It is, therefore, sensible to expect a significant contraction in the value of payouts received by the Club this year and, therefore, to the overall return. An exact impact cannot yet be quantified but the trend points to a material reduction. At the time of writing, the FTSE 100 dividend futures point to a fall of almost 45 per cent in market income over the coming year.
We cannot predict the shape or timing of any recovery in dividends though we hope that the current situation will prove to be temporary. However, there is no room for complacency since the collapse in revenues and cash flow will lead to compromised balance sheets. We have already witnessed attempts to bolster these through fundraising and extending borrowing facilities. Good businesses have fallen alongside weaker ones and for some it may permanently impair them and their dividend paying ability. For others, though, it will prove to be a passing setback from which they will emerge stronger. Businesses will need to encourage people back into their bars and restaurants when the lockdown ends, despite the fears over safety persisting. Smaller companies, being more badly hit, will need to build new consumer relationships quickly.
After all the gloom and anguish there is a natural desire to feel positive about survival and the chances for a swift recovery. But the indications are that the consequences of Covid-19 will be felt deeper and for longer than first thought and that over-optimistic expectations must be cautioned against. Pandemics tend to come in waves. Shutdowns aim to ‘flatten the curve’ to prevent health systems from being overwhelmed: they do not in themselves end pandemics. A gradual reversal of current lockdowns is not synonymous with a quick return to normal. We should expect that stronger and bigger companies are likely to survive better and, possibly, takeover their weaker brethren and enhance their already privileged positions. Anyway, who can tell if people’s social habits will be permanently changed? The exit path from lockdown will be precarious.
The collapse in commercial activity is already more profound than in previous recessions. It is not to be unexpected that after such a shock investment markets will look towards light at the end of the tunnel and, as after previous panics, there will be an eventual relief rally. This might already be occurring as some countries begin to report declining death tolls and contraction rates. However, history shows such rallies to be often premature and sometimes false. Given the possibility that tricky new health protocols will continue to be in place for some time, as will the possibility of a second wave of illness, it might be right to foresee a future that is not v-shaped, u-shaped or even w-shaped but more like that of a bathtub.
Whilst a single quarter of economic setback and then a steady recovery might be achievable, it does look like a best-case scenario at the moment. I suspect that, for many, 2020 will effectively be an economic write-off.
Whilst we need to look through that shadow, I suspect that what we will see is not what we had before. For the Club, the short term aim has to be to conserve cash, not least so that we can meet any increase in demand for withdrawals. Looking further forward, if our cashflow is halved because of dividend holidays it will be more challenging to build a reservoir of dry powder to deploy when opportunities are clearer. On the other hand, so long as investors do not capitulate, it would be wrong to be even more bearish even if markets do fall after a relief rally bounce.
We will continue to monitor the situation closely and would urge members to continue with their contributions. We are under no illusions regarding the challenges we face but believe that this too will pass.
Our thoughts are with all those affected by this crisis.
John Hattersley is chairman of the CAMRA Members’ Investment Club.
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