The Hangover is coming

June 13, 2020

You don’t need to be a rocket scientist to know that the sugar hit from both Jobkeeper and Jobsaver are going to cause a terrible hangover.  Its further exacerbated by the subsidies to childcare.  I’m not against all these initiatives, rather I think that the Government acted well and did a great job softening the economic impact of the Corona virus.  I am however concerned about the real impact to the economy and the hangover that's coming.

 

 


 

The lack of productivity with people working from home and the resultant binge shopping, has caused a massive surge in like-for-like sales for online retailers.  Some of this exuberance however is being paid for through government subsidies which will end.

 

What happens when the support packages end?  People paying off their Afterpay account with government subsides?  And they will end.  Parents will have to pay full freight for childcare, Jobkeeper and Jobsaver will end.  Some companies will have taken the opportunity to downsize and reduce headcount and some businesses will just disappear.  If a company's revenue is down for 3 months, the company has to make a difficult decision, do I rehire everyone and cause pain to the business's bottom line or do I rehire a percentage of what was employed before and protect the bottom line of the business?  Either way you will have reduced profits or increased unemployment, both of which will have a real impact on the economy.

 

We are still cautious about valuations and inflation.  Yes we understand that low interest rates increase equity market valuations, but so too do lower profits, reduced spending all in an economy that was already damaged by bushfires, then a significant lockdown.  If you look at the number and dollar value of money raised via listed company capital raises, its staggering.  Many smaller private and unlisted business don’t have the same ability to raise capital so its either the cash on the balance sheet that gets hit, the owners inject more funds or they increase their borrowings, all of which reduce funds for capital expenditure in the future.  So unless you’re an online retailer its hard to think that the share markets exuberance is factoring in any changes in business conditions or balance sheets

 

I don’t want to be a perma-bear, I live with the optimism that we will get back to normal business conditions albeit with weakened balance sheets, diluted EPS all the while under the cloud of the hangover from Government stimulus that has long-term economic implications. 

 

We can’t see around corners, but we can see the hangover that’s coming.We still think in this environment that owning high PE stocks with little or no profits is fraught with danger.

 

Happy Investing

 

Michael

 

 

 

 

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