2020 COVID And Its Related Share Price Dip

At the start of 2020 a number of UK shares dropped significantly because of COVID 19 and a number of people who were at home and still getting paid started buying shares for the first time.

Inevitably this will have meant that some people will have got lucky and guessed the right shares to buy.

I guessed wrongly and didn't sell up at the start of 2020 because I didn't believe that so many governments would panic the way that they did.

Easy successes can be dangerous as it can inspire unjustified confidence and was is it really a well-considered decision or just a guess that seemed obvious and has turned out well. If the purchase really was that obvious then why was the share price so low?

It is very easy for these early successes to starting to turn into losses and self deception can become a problem; Shares was bought expecting a quick profit and now that the profit is not there, well it is still a good long term investment.

Funding Circle are at first glance an attractive purchase, a low share price and a lender under the Governments guarantee scheme what's not to like?

The problem is that historically they have had quite high bad debts and all lenders have got to be expecting even worse performance from COVID loans and apart from a COVID revival Funding Circle have been on a downward trend since it floated.

If you didn't buy shares and are regretting it and are tempted to jump in now then beware that not all is as it might appear.

One other thing to note, if you just looked at a share price graph and thought wow and didn't buy the shares you are probably unaware that you might not have been able to buy them anyway. There are a number of companies that I looked at and was unable to buy shares in at known pricejust out of curiousity I went as low as £250 worth and still couldn't buy.

By now, Sep 2020, a lot of the obvious over selling has been recovered so there is now a reason why the current prices of companies like Saga, Easyjet or PurpleBricks are where they are.

All have share prices that could easily double as this would only bring them back to well under their recent peaks. Or they could remain where they are or drop as the costs of staying in business becomes more apparent and have in fact doomed the company or at least its current shareholders.

You have to dig more deeply than the headlines but many companies have been taking on significant debt, using VAT payments that the government has deferred as working capital or doing big share issues.

Often this takes time to really register on a share price, one day the market doesn't care, the next an unstoppable sell off takes place.

A recent while back Countrywide had this happen to them and after a while with the shares languishing at a few pence the management did a share consolidation. For every 50 shares in circulation they cancelled the shares and gave the owner 1 new share. This means that all the shareholders still owned the same amount of the company but instead of each share being worth 2p they were worth a one pound and to the casual observer still have a lot of value.

Barclays, Lloyds and HSBC are also sitting at around 60% of their start of the year prices having dropped to around 40%.

What about Superdry and Ted Baker? Both own brand fashion retailers who were in big trouble at the start of the year possibly because the brand is now tired. Again a graph says a four fold return, but if the brand is tired then the price is staying where it is now.

The 2008/2009 banking lead crash was in my view a very different situation to the 2020 COVID led issues, in 2008 most businesses were pretty much unaffected they carried on doing what they were doing and mostly the share price drop was just not that reflective of their business.

2020 is different because it is the business that is affected and the share price drop is mostly reflecting the new circumstances.

Companies that you might have thought of as being at the top of the chain and secure suddenly became vulnerable and many of these companies passed the pain down the supply chain.

Some of this was reasonable, if you are an airline and you have a contract for a minor service to your engines every 200 flights and you aren't making any flights then you won't need the service. But this is still painful for the company that expected to be doing the servicing.

Other cases were much less reasonable, such as not paying for goods or services received.

As so much of this pain was coming from the top of the customer chain it is almost inevitable that fairly viable business further down the chain would go out of business taking some of their suppliers with them.

If this is allowed to happen in any quantity then indirect suppliers, car dealers, bike shops and cafes will also be brought down as their customers can no longer afford their services.

The Government is well aware of the risk described below and has thrown a lot of money at a lot of businesses with both grants and guaranteed loans to try and avoid this sort of collapse.

Yet it far from clear if this will be successful.

• if British Airways stops flying its Airbus A350s then
  
  
• the Rolls Royce Trent XWB-97 engines don't run,
  
  
• so nothing needs replacing or servicing,
  
  
• nobody needs to provide food for the flights,
  
  
• the airport closes down.
  
  
• the catering company closes down.
  
  
• nobody needs taxis to the airport.
  
  
• and Rolls Royce jet engine business goes out of business.
  
  
• the car dealer providing vehicles to the people at RR Derby who were made redundant closes.
  
  
• as does the cycle shop which used to sell £4k carbon fibre bicycles.
  
  
• one of these made redundant can't afford the rent on their house owned by someone with a buy to let mortgage.
  
  
• the person with the buy to let mortgage defaults on this as well as his car payments as he was using those to keep the house.
  
  
• So he stops going to the pub/restaurant.
  
  

Okay this is a bit dramatic and the UK government has been very quick with loans but a lot of these are it was headline grabbing but only partially addressing the core problems,we may well see how these loans have simply delayed the inevitable.

Added to which the novelty has worn off and BrExit is starting to grab the headlines again and it appears as if the Government regards COVID as problem solved.

Rolls Royce's recent announcement that they were expecting big losses due to loss of engine maintenance income was expected most people who had thought about it. What I missed was the fact that they have hedged USD sales over the next few years and the cost of that hedge is payable regardless of whether or not those sales take place or not.

How have so many business get to point where despite having their wages paid, a rates freeze and in many cases a cash grant they still don't have the reserves to survive without a loan?

In some cases this was a result of prioritising expansion over creating a reserve but in many cases it was because the business was just about viable or not really viable but the owners didn't want to close it down.

These businesses now have another loan to repay and quite possibly reduced sales as people have become used to not having whatever it was they provide. Clearly there will be a temptation to increase prices, but this is a huge risk that the rise may not be accepted.

There is a huge risk of a massive increase in bad debt from all groups of customers, personal, small businesses, medium sized businesses and big businesses unlike 2008 all sectors of the economy are being affected.

Working from home has started being reported as a wonderful thing for businesses, the way forward etc.

With a past as an IT contractor I have a long term perspective of staff working at home and it is very different to the current hype. I eventually rented an office to ensure that work and home were kept seperate and because I didn't have the space at home for a properly set up work environment.

• Inefficiencies start to develop as people need an immediate answer and the person that can provide that answer is not accessible.
  
  This is similar to organisations that have flexi time with wide start and end times, a lot of time is lost sending and answering emails and swapping between tasks as the information needed to complete a task that would be a 30 second chat holds you up for hours.
  
  
• Knowledge doesn't get shared within an organisation, in a office there is a continual background exchange of problems, solutions and new ideas. This can't be replaced with a computerised knowledge database or a weekly/monthly meeting.
  
  
• Training of new staff really starts to suffer, if the core of the people doing the job are at home how do you train new staff?
  
  
• Recruiting of staff becomes an issue if you require employees to work from home as many can't or don't want to.
  
  
• If people aren't usually required to come into work they get out of the habit of doing so. If the working day starts at 9:00 resentment starts to build up if people are required to be in the office by 9:00 for a one off meeting. The time spent travelling to work starts to be seen as part of the working day.
  
  People even lose the ability to get into work, if they have to go to work every day then they buy a car, bike etc or catch a train or bus. If you work from home you may see the car or bike as an unnecessary expense and sell them, and if people don't use the train and bus services they will be phased out.
  
  
• IT security becomes a massive issue, both ensuring that equipment that is shared with personal use is secure and that "little Johnny doesn't delete a few customer accounts while mum/dad have gone to put the kettle on".
  
  
• People become sloppy, someone recently asked me to do a video chat and he felt it okay to be dressed in a sweatshirt for the call.

At the moment people are tolerant of being shunted from one place to another and mobile calls that drop out, but that won't last forever. Especially among customers who have been excluded from the government's paid holidays that many have been enjoying.

A lot of smaller businesses were given grants of £10k or £25k, via the Small Business Grant Fund and Retail, Hospitality and Leisure Grant Fund and often this money was gone in a flash. It is unclear how many business realise that this is taxable income HMRC not a freebie.

Suddenly these grants are looking a lot less helpful.

If the idea that the private sector has sustained semi-permanent big job loses can the government borrow enough to fund significant job growth?

This question has two parts, can it borrow enough money to do so? The answer is not obviously yes not only is the UK national debt high, there is every expectation that tax revenue is going to be down in 2020-2021 meaning borrowing more just to stay even.

Would these job creation programs actually be anything other than another plaster until the next general election and possibly another person's problems?

A lot of the high value jobs may have gone because of a lack of demand, so if you invest in a hypersonic plane project that will get people from the UK to the USA or Australia in an hour or two and succeed what then?

You make the fleet of the already indebted airlines obsolete and the few planes that you do sell don't outweigh all the jobs that you have just wiped out.

The 2022 debt number represents about 100% of GDP

Whether a country cares about national debt to GDP is another question as Japan's was 2.37:1 in 2019 but most "Western Economies" are around 1:1.

There is a big fudge in the UK numbers though as government bonds bought by the Bank Of England as part of the Quantative Easing programs covers nearly £750bn of the total debt.