![]() Evidence is growing that banks are ‘looking through’ the COVID-19 crisis and are showing leniency at the point of covenant test. Consequently, rather than being part of the problem, banks will need to be part of the solution. Regulators have forced banks to rebuild their capital since the global financial crisis. In the case of banks, the UK’s Financial Conduct Authority has stepped in and requested that no dividends are paid in 2020. It is rapidly becoming socially unacceptable to pay dividends to shareholders if any level of government assistance has been received. In addition, dividend payments are being deferred or cancelled. Capital expenditure is being delayed, operational costs are being cut, working capital is being squeezed, and colleagues are being made redundant and furloughed. This is affecting those with strong, differentiated business models, not just the uncompetitive and weak. This is not a situation that can remain in place for long.Ĭompanies are reacting logically and reasonably by focusing on short-term liquidity and survival. For example, through the system of furlough, the government is now effectively paying 80% of the salaries of furloughed staff up to a maximum of £2,500 per month. The ‘social contract’ between the government and the people has remained intact, to date, by the promise of material financial assistance. Government-imposed lockdowns are resulting in precipitous falls in economic growth that, without government intervention, would inevitably lead to immense hardship by many in society. ![]() The demand shock being experienced by both large and small companies has been sudden and dramatic. If successful, this should maximise the chance of the COVID-19 pandemic being a transitory event and should allow economic growth to return once the effects of the virus recede. Governments and central banks are determined to prevent the permanent destruction of productive capacity. The aim is to prevent a liquidity crisis from turning into a solvency crisis. Central banks and governments have been quick to respond, with significant stimulus aimed at ensuring the smooth functioning of financial markets, and to minimise the economic pain for both businesses and individuals. In the face of such a severe demand shock, many companies have been forced to abandon business plans and run their businesses for cash. As the virus has spread internationally, concerns over supply have quickly switched to the destructive impact on economic demand. The initial outbreak in China focused investors’ minds on the ability of supply chains to function and meet the global demand for goods. ![]() The emergence of the COVID-19 pandemic has resulted in an unprecedented global economic supply and demand shock – change will accelerate, and the world must adapt. Following the decisive general election result on 12 December 2019, UK sterling, investment intentions and consumer confidence rose – the sunny uplands of the ‘Boris Bounce’ had emerged. ![]() Companies exposed to the UK economy in particular, were poised to benefit from an economic and political landscape with a level of certainty not seen for many years. ![]() We had just seen a stellar year for equity returns in 2019. It may seem almost difficult now to remember where we were at the start of 2020. The past six months have, once again, shown that the only thing we can be certain of is change. ![]()
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