BPR Green shoots bulletin
BPR Bulletin May 2009
Green shoots futures overbought...for now?
Searching for “green shoots economy” on Google produces 4.1m hits; there are 5,364 “green shoots” articles listed in Google News and the Economist “green shootometer” is at an all time high. What does this mean?
We’re grateful for the many and growing numbers of people demanding the return of the BPR Bulletin. First, an apology. As you may see, we’ve been investing heavily in the redevelopment of the BPR website. We hope that you found Mark Andrews’ Budget briefing useful and informative. We’ve also had as much business as we can handle in all departments.
Finally, we wanted to see overwhelming evidence on all fronts that the global economy may be bottoming out. Everybody (except Robert Peston, Roger Bootle and the BBC) is fed up with the bad news. We have waited until we could fill two pages with good news. We don’t draw firm conclusions...you can make your own minds up...but between the economic and political rhetoric, there is a growing wealth of hard evidence of a turning point.
Previous thoughts
And if you remember from previous bulletins, we’ve flagged up, inter alia:
• The difference between ‘write-offs’ and ‘write-downs’. As markets recover, the latter could add a positive boost to banking and government coffers as they unwind. Also, having taken e.g. RBS shares at 30p, they could make a handsome profit.
• The only solution is for the government to print money. So how come it took them so long? The danger now being inflation as the downturn unwinds. We expect longer term government security yields to rise significantly over the next year and the next interest rate move to be upwards.
• Too much doom and gloom. Yes, cash is king, but professionals and investors have already started moving into equities and corporate bonds, commercial and residential property. It’s much easier to buy on a falling market.
• A V-shaped recession. This has been the sharpest fall in the global economy since the 1930s. It may recover equally quickly before falling back for a steadier recovery. Interest rates are the lowest since the Bank of England was founded in 1694. Consumers not on a fixed rate mortgage have had a massive boost to spending power. ‘Stagflation’ is a risk.
• The need for a ‘root and branch review’ if you are in business. And we’ve done loads of those, mostly funded by Business Link.
• Banks have to start lending to each other. They are. LIBOR is now less than 1% above Base Rate. It’s fallen further in the US; banks have been able to raise capital in markets.
• Treasure cash and keep an eye on your credit rating. Euler Hermes aren’t alone in reducing/removing credit limits. Businesses have got used to relying on overdrafts as medium term capital. That has to change, especially as banks now prefer invoice discounting to fund businesses, mainly because of their own capital considerations.
So what’s the good news?
Plenty, if you look for it. We are not likely to be in the business of making predictions…. However, consider these facts and possibilities:
• Emerging markets are expected to lead the economic recovery; especially China, which is unlikely to hit recession, has been buying raw materials and stimulating its economy for recovery. That’s a big difference from the 1930s. Brazil and Russia should do well on metals and minerals; India can be one of the great industrial countries in the world.
• Consumer confidence has turned. In every economic zone in the world. Unless you read the BRC figures, where people are worried about jobs. Unemployment is a lagging indicator of economic performance. UK business confidence has risen two months running. European consumer confidence is up 15 points; US consumer confidence rose by the most in 2 years in April; business and consumer confidence measures are rising across the world; Chinese retail sales are rising.
• Residential property may be bottoming. Again, there is evidence from across the world. The decline in home prices in 20 major U.S. cities slowed in February for the first time since 2007. A new traded security based on US house prices has been launched. Buyer enquiries are at a two year high in the UK. Both the Bank of England and the Council of Mortgage Lenders are reporting higher mortgage approvals. “Fifty per cent of developers are predicting that house prices will stabilise by the end of the year.” Because of the house price crash, developers have drastically cut their building. It takes time to restart this, which means there could be a sharp price recovery if demand returns. Numbers of would be first time buyers are growing. Annualised house prices will continue to fall after the market has turned, because there are 11 months of negative historical figures to work through.
• Car sales are rising in China and India; Toyota is increasing production; there is a growing shortage of secondhand cars in the UK
• Global equities have just seen the biggest and longest rise since the 1930s.
But what really matters?
If you’re worried about losing your job, nothing else matters – except the health and happiness of you and those you care about. If you’re in business, it may still be survival that tops your agenda. Credit risk insurance has become a major issue as we predicted. AIG is now £80bn owned by the US Government and Euler Hermes had its biggest monthly losses ever last month. (The two largest UK corporate risk underwriters).
Whether you have invoice discounting/factoring or not, the risk rating of your customers is now critical to many businesses – but not as critical as your own rating. At BPR our mantra is customer service and we’ve been investing to understand the corporate risk market, so that we can help you. It may have changed for all time. We’ve had clients and their customers’ credit ratings removed overnight. So what is the significance of these lasting changes?
• Cash is king. Get more sales; ask for shorter payment terms, including cash up front where possible; stop living on overdraft; convert borrowings to medium term debt.
• Invoice discounting/factoring is the name of the game for banks in future. Debt margins are higher and will remain so for the foreseeable future.
• Take this last opportunity for a fundamental business and financial review to be fit for when the economy really starts to turn.
In the meantime, we’re here to help. Just ask.