Monday’s 8% fall in the main Chinese share index was roughly the expected reaction to the coronavirus outbreak. After an extended non-trading period, this was the first opportunity investors had to respond to the health emergency and weigh the short-term economic impact. A plunge was inevitable, however much money the Chinese authorities pumped into the banking system to support liquidity.
It is harder to understand, though, what we’re meant to conclude from the many detailed studies by City economists and analysts of the behaviour of global stock markets during the Sars crisis of 2002-03. These analyses tend to start with the same observation: that equities initially fell after the outbreak of Sars, but then regained the lost ground within months. What, though, is this fact meant to show?
The comparison is, presumably, intended to warn long-term investors against panic. Fair enough, not panicking is a reasonable default position in most market circumstances. But, just as one wouldn’t expect stock market tips from an epidemiologist, so it’s ridiculous for City pundits to push the thesis, however vaguely, that the spread of one viral outbreak might be a bit like another. One suspects the scientists apply more rigour.
Second, China is a very different place now than it was in 2003. Its economy is far larger and more connected with the rest of the world, so economic shocks could be magnified. Most City pundits make this point, but then inexplicably cling to the idea that the stock market response might be similar anyway. There’s no logic there.
Third, the starting point of stock markets surely also matters. At the end of 2002, stock markets were still in a funk after the bursting of the dotcom bubble, but then began a long upwards march at the start of 2003, which coincided with the Iraq War. Today’s climate is different. We’re many years into a global bull market and valuations, at least in the west, are generally regarded as “stretched” by usual yardsticks.
To repeat, “don’t panic” is a fair investment message, but the hunt for reassurance from history feels absurd. If you read the financial analyses to the end, most contain a get-out clause along the lines of “we just don’t know”. It should have been the starting point.
Ryanair will hope 737 Max delays are kept to a minimum
In purely financial terms, it’s not the worst financial news for Ryanair that its deliveries of Boeing’s 737 Max aircraft will be delayed. For starters, Ryanair can expect compensation from Boeing to cover extra costs and losses. That sum could be substantial, since the Irish-based airline had expected to have 55 of the aircraft flying this summer and now will have none.
Then there’s a factor that chief executive Michael O’Leary presumably won’t emphasise in negotiations in Seattle: unplanned removal of capacity in the European market means higher fares for passengers. Ryanair itself reported a 9% increase in fares in the third quarter, and easyJet told a similar story recently in the wake of Thomas Cook’s exit.
O’Leary, though, won’t be relaxed if one year’s delay turns into two. He’s assuming it is “likely” that Ryanair’s first Max aircraft will arrive this autumn, but every prediction by Boeing, as it has tried to recover from two crashes that killed 346 people, has been wrong so far.
A two-year delay would start to cause operational headaches. Ryanair would be deprived of the savings from the Max’s 16% lower rate of fuel-burn and 4% extra seats (what O’Leary calls “game-changer” efficiencies) and potentially be forced to cut a few routes beyond the less profitable ones that it can afford to trim. What Ryanair really needs from Boeing is certainty – and that still looks some way off.
Mike Ashley bags stake in Mulberry
Mulberry, the Somerset-based handbag firm, has tended to blame upsets at House of Fraser for half its woes in recent years, but now it has a fresh headache. HoF itself – or, rather, Sports Direct/Frasers – has bought a 12.5% “economic interest”. Mike Ashley won’t be there to admire the designs.
Quarrels are almost guaranteed when Ashley indulges his addiction for share-buying adventures. This purchase is relatively small, since 12.5% of Mulberry is worth only £19m, but the stake-building looks pointless. The Ong family own 56% control of Mulberry, so won’t be inclined to offer a boardroom seat.
Maybe Ashley is just annoyed by Mulberry’s grumbles about how it wants “clarity” about his plans for HoF. If so, the answer is just to buy a few handbags and deliver on the supposed “elevation” strategy.
