Michael Hewson MSTA CFTe
CMC Markets
- UK Q2 GDP (Preliminary)/Manufacturing output (Jun) – 12/08 – most recently in Europe we’ve seen eye watering drops in output in their latest Q2 GDP numbers. From Spain which saw a Q2 drop in output of -18.5% to Germany which saw a more modest -10.1% drop while the US saw a -9% fall in output. This week’s preliminary UK Q2 GDP numbers are expected to be no less sobering, with estimates from anywhere between -15% to -25% for Q2, a big drop from the -2.2% contraction seen in Q1. Whatever the numbers are, and they won’t be pretty, the more important question is how quickly the UK economy can bounce back, and we have seen some progress on that. This week’s numbers will cover the sharp fall seen in April which the monthly numbers showed as a -20.4% fall, followed by a 1.8% gain in May. This means we need to see a sharp acceleration in the June numbers, to pull the quarterly number back up into the mid-teens, given the UK’s heavier reliance on services, which is likely to act as a drag on the prospect of a v-shaped bounce back. We did see strong rebounds in May manufacturing and industrial production of 8.4% and 6% respectively so the hope is that continued into June as well as those sectors also got back on their feet, after their April lockdowns.
- UK Unemployment/Jobless claims (Jun/Jul) – 11/08 – it’s becoming quite apparent that the ILO unemployment numbers bear no relation to the actual number of people out of work, or who are likely to lose their jobs in the weeks and months ahead. At 3.9% for the three months to May, they don’t reflect the number of employees who are on furlough, and as such are not looking for work. In the June jobless claims numbers, we got a better idea of the overall picture at 7.3%, which saw a reduction of 0.5% as more shops reopened as lockdown restrictions were eased. This may well improve further in the July numbers, as hair salons, and some pubs and restaurants re-opened, however with a lot of major companies announcing thousands of job losses in the past month or so, you could see the claims number start to edge up again, even as the UK economy continues its re-opening path. To get a better idea of what the jobs picture looks like is comparing the number of people on the payroll before the March lockdown. This was 660k lower in June, so it seems inevitable that this comparison will continue to be used as a useful benchmark.
- US retail sales (Jul) – 14/08 – the last two months for US retail sales saw a significant rebound in US consumer spending after very weak months in March and April. An -8.7% decline in March was followed by a record -14.7% decline in April. With the significant fiscal support supplied by the US government and a reopening of the US economy in May, saw a sharp rebound in US consumer spending. A record rebound of 18.2% in May, followed by another 7.5% in June had raised hopes of a v-shaped recovery, however events in the past few weeks have cast a shadow over those expectations. The sharp rise in coronavirus cases and rising death toll in the US sunbelt states, along with the reimplementation of local lockdown measures has raised fears that we’ve seen the high point as far as the economic bounce back is concerned, while a sharp fall in US consumer confidence in July, could see US consumers adopt a new safety first approach. Expectations for July retail sales are expected to see another positive number, of 1.4%, however there is a high chance that this could well be on the optimistic side, given the sharp rise in virus cases and re-imposition of lockdown measures throughout July.
- US weekly jobless claims – 13/08 – the sharp rise in coronavirus cases across the US in the last few weeks has the potential to see both jobless claims and continuing claims to start edging higher again. We did start to see evidence that weekly jobless claims were starting to do just this before last week’s surprise sharp fall to 1.18m, and their lowest levels since early March. The fall in continuing claims to 16.1m and their lowest levels since 10th April was also encouraging. The big concern now is that given the expiry of the enhanced $600 a week unemployment benefits at the end of July, combined with reversals in hiring in the wake of new lockdowns, is that these numbers could start to rise again. The failure of US lawmakers to pass new legislation to cushion the effects of the July 31st $600 cliff edge, could well be the catalyst that sparks a rise in the claimant count over the next week or so.
- China Retail Sales/Industrial Production (Jul) – 14/08 – there does seem to be some optimism that the Chinese economy might finally start to see something akin to escape velocity, when it comes to its economy. Whether you believe the recent Q2 GDP numbers or not, which I don’t, there is optimism about some parts of the economy. We have seen some optimism in the recent PMI numbers particularly on the services side, and while it hasn’t as yet shown up in the retail sales numbers, they are still showing improvement from the lows we of -15.8% saw in March. Since then we’ve seen declines of -7.5%, -2.8% and -1.8% between April and June. Expectations are still for measly gain of 0.2% in July. This is surprising given that we’ve seen reports from the likes of Apple and Daimler that have reported big rebounds in their Chinese markets. This week’s July numbers need to reflect that along with this week’s latest market updates from the likes of Tencent and Alibaba, which should give us a better insight into consumer spending patterns of the Chinese consumer. Manufacturing has performed better relative to the Chinese consumer, rebounding to its best level in almost a decade in the various official and private sector PMI’s. Industrial production is expected to rise 5% in July.
- Prudential – H1 20 – 11/08 – asset managers and reinsurers haven’t had the best of times of it in recent months with the sharp falls, and subsequent rebounds in financial markets. In May Prudential said that Asia sales had seen a 24% fall year on year due to the problems in China and Hong Kong. Outside of the Asia region the picture was more positive in Q1 with the US market outperforming with a 25% rise in sales, however this is likely to be offset by a poor performance in Q2 given the lockdowns there. With that in mind management downplayed their expectations for Q2 saying that they expected it to be challenging quarter. In July Prudential completed a $500m equity investment by Athene Life into its US business, Jackson National Life Insurance, as it looks to bolster its capital position. The company has already divested its UK operation, and there is the possibility that this deal with Athene could be first step to doing something similar with its US operation.
- Intercontinental Hotels H1 20 – 11/08 – in its last quarter, Holiday Inn and Crowne Plaza owner IHG reported that revenue per available room (RevPAR) was down 24.9%, as a result of the various lockdown restrictions hammering the travel and leisure industry. While airlines have seen the bulk of the negative headlines the hotel sector has been hit hard too. While half of IHG’s hotels are in the US, the occupancy rates have been fairly low, down in the region of between 20% to 30%. In June management said they expected (RevPAR) to be down 75% year on year on the quarter and 52% down on the first half when it reports later this week. The most significant improvements in the outlook are expected to show up in the greater China region, as well as its US franchises, however these could have suffered a setback in July due to the re-imposition of lockdown restrictions in some US states. With $2bn of liquidity still to draw on, investors will be looking for progress on the $150m in cost savings, the bulk of which are set to be delivered by the end of this year.
- Balfour Beatty H1 20 – 12/08 –after selling off sharply in February as the UK economy went into lockdown the shares have rebounded and stabilised. Under the stewardship of CEO Leo Quinn, the company is on a much more stable footing, with the company only focussing on high margin work. This has helped hugely in maintaining a healthy cash flow and saw profits last year rise 8% to £221m, when the company reported full year numbers in March. A rise in the order book and focus on high margin work saw net cash rise 68% to £325m. In June the company pulled the dividend to conserve cash, despite an order book of £17.4bn and a fairly solid liquidity base, of £452m in cash and £375m in credit. The company also has £3bn worth of contracts in relation to HS2, though given recent events around Covid-19 you have to question whether pursuing such a project still makes economic sense to future governments. The cancellation or deferral of some of these HS2 contracts could be a risk if government priorities shift in the wake of recent events.
- Lyft Q2 20 – 12/08 – the lockdown has hit ride sharing app companies quite hard as the likes of Lyft and Uber got hit hard as a result of the April lockdowns. In April the company saw the number of active riders fall by 75%, however due to a decent performance in the remaining three-month period we still saw a 3% rise year on year, on revenues of $955.7m. Profits are still set to remain elusive, with the company posting a $1.31c loss in Q1, and this is set to improve only slightly to a loss of $1.10c in Q2. The company is also looking to expand into the car rental business having partnered with Sixt, as it adds a rentals option to the ride sharing app.
- Cisco Systems Q4 20 – 12/08 – Cisco was one of the few companies that did offer guidance when it reported in May given its role in the technological architecture of the world wide web. Its Q3 numbers saw revenues and profits come in above expectations, even though revenues were still down from the same period last year at $12bn. It’s been a steady income earner for a lot of US investors and did see some disruption in its China business last year, due to ongoing US, China trade tensions. As far as Q4 is concerned management said they expected to see a 10% decline in revenues over the quarter, though profits are expected to come in at $0.70c a share, with the shares seeing a steady performance over the last quarter. The company is also set to be in a good position to capitalise in future investment into the growth and potential of 5G networks.
- Vroom Q2 20 – 12/08 – this will be Vroom’s first quarterly report as a publicly listed company, after its IPO launch in June, and progress so far has been solid, burning rubber off the starting grid rising from an IPO price of $22 to close at $47.90 and a market cap of $5.52bn on its first day of trading. The enthusiasm for this new on-line car ordering and delivery site has shown little signs of waning in this new Covid-19 world with shares trading up near $60. The progress and enthusiasm is all the more remarkable given that the company isn’t even close to being profitable. The company has never made a profit since it started in 2012, last year it lost $143m, and lost $41.1m in the first quarter of this year, while sales rose to $375.8m in March. The enthusiasm here appears to be based on the premise that clients would be happy to buy a car without test driving it, checking how it drives, the quality of the finish and how it looks inside and out. This seems a tough ask, however we already know that how the market values a business bears no relation to whether or not it actually makes a profit. Losses are expected to come in at $0.73c a share.
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