Much of Europe is hunkering down for the second wave of the pandemic, and the economic consequences could be catastrophic.
Covid has tested the resilience of corporate balance sheets across the Continent and in Britain and is placing enormous strains on national budgets.
Layer on top nerves in the run up to next Tuesday’s US elections and Britain’s still unresolved Brexit trade deal with the EU and there is maximum stress. In line with most of the Continent the FTSE100 dropped by 2.6 per cent and is at a six-month low.
Alex Brummer says much of Europe is hunkering down for the second wave of the pandemic, and the economic consequences could be catastrophic
Confidence was not helped by a Lancet article in which the UK’s vaccines czar Kate Bingham cautioned that many, if not all, of the vaccine candidates could fail. What is inarguable is that the costs of the pandemic are soaring out of control. Businesses across Europe have borrowed an extra £589 billion this year.
The UK is swimming in government debt as the costs of furlough and successor schemes soar. Government borrowing this year could reach £400 billion, leaving the Chancellor Rishi Sunak with very little wiggle room when he delivers his public spending plans for the next year on November 25.
Even though the budget has been postponed, markets would be less shaky if Sunak provided guidance on the future course of the public finances. The sub-octane performance of UK shares is not academic.
The disease has demonstrated the importance of equity as firms have sought to strengthen balance sheets. Among those raising new equity have been BA owner IAG, Rolls-Royce and Whitbread as well as countless smaller enterprises.
The most worrying aspect of market weakness is that FTSE companies have become a happy hunting ground for private equity vultures. Among those under siege is G4S from Canada’s Garda World. Others targets, such as Countrywide and retirement home builder McCarthy & Stone, have simply given up the ghost.
Aviva’s investment guru David Cummings is critical of weak managements ‘selling out at too low a price’. In most takeovers these days, the hedge funds play a key role.
Rolls-Royce is one of the firms that has raised new equity amid the pandemic in a bid to strengthen its balance sheet
But it would also be terrific if long holders, such as the funds managed by Aviva, would show more steel in the face of bargain-hunting marauders with little interest in developing the underlying enterprises.
The course of the disease is still something of a mystery and conditions could get worse for companies with hospitality, travel and retail tottering on the edge of a precipice.
Nevertheless, the certainty of a clear outcome to the US elections, which unlocks infrastructure investment and more pandemic support, would underpin Wall Street and global markets.
A British-European trade deal – even one which fails to sort out the future role of the City of London post-Brexit – would be better for markets than no deal at all.
Unilateral acts rarely make for good outcomes. Kaz unleashed Kazakhstan is enjoying the limelight. Sacha Baron Cohen put it back on the map with Borat Subsequent Moviefilm – a raw takedown of Donald Trump. Now, Oleg Novachuk, chairman of copper producer Kaz Minerals, wants to take the London-quoted company private with a £3 billion cash deal for the 61 per cent of shares he and associates don’t own.
Chelsea owner Roman Abramovich has committed his 6.1 per cent to the offer. The ostensible reason for the deal is that investors are reluctant to back a £5 billion-plus investment in what is seen as a risky new copper mine in Russia.
The big question for minority investors is whether or not the 12 per cent premium to the market price is enough. By recent takeover standards, it looks low-ball. What we do know is that there has been a huge upsurge in the copper price of late as China piles funding into infrastructure as it pulls out of the Covid downturn.
An independent committee of the board is recommending the offer. That is a feeble response given the current copper boom and waferthin premium.
Minority investors have the whip hand and could demand more since the deal requires 75 per cent of them to sign up. Next trick No one knows how to under-promise as well as Simon Wolfson.
In an era of downgrades, Next has revised up its full-year profit forecast to £365 million amid brilliant online sales led by home and childrenswear. What a contrast to much of the rest of a bedraggled and forever whinging sector. It’s management stupid.