— May 26, 2020


We spoke last month about markets pausing for breath and this has generally proved to be the case, with UK and US Equity indices having pretty much traded sideways since we wrote our article.

We feel that we are now approaching the yawning chasm where the focus turns from the macro level to the micro level.

What we mean by that is that so far equity markets, and so most company share prices, are being buoyed by all the macro fiscal (government) and central bank (monetary) policies being announced and thus cash introduced into the economies to help businesses survive and stave off mass unemployment.

At some point attention will turn from that to the micro individual company level, where the true state of company finances and trading becomes clearer.

At present most companies have withdrawn any kind of future guidance in their statements as they have little way of forecasting what the outcome of trading may be. As such investors are virtually in the dark, having none of the usual information they require to estimate profit and dividends and trading trends. Instead the judgements presently are predominantly about which companies will still be around when the dust has settled.

One strange facet of the lockdown is that investors don’t have to worry about profit warnings;  almost every company is trading poorly or in some cases not at all, so all companies are presumed to be pregnant with a profits warning. Companies announcing merely that sales are down is largely met by a shrug by markets. The real focus is on balance sheets and cashflows – assessing how long companies can endure specific levels of trading. Some companies have been undertaking placings to raise cash, it is hugely dilutive to ordinary shareholders, for sure, but in these extraordinary times taking survivability questions off the table has considerable merit.

However, the true test will be once we return to some degree of normality (assuming we do) then reality will impact and we will see investors start sorting the wheat from the chaff. This will produce many surprises and undoubtedly wild gyrations in individual share prices. Active managers will need to be on their toes to navigate such circumstances effectively for their clients.