On the Monday after Lehman Brothers collapsed in September 2008, the FTSE 100 fell 3.9%, which we now know was a woefully complacent first take on events. London’s blue-chip index, then at 5,204, went on to shed another 1,400 points in the following six weeks.
It’s a point to remember when looking at the coronavirus “carnage” on stock markets this week. Short-term share price movements, such as Thursday’s 3.5% decline in the FTSE, don’t tell you much when truly big global events happen. Even the 8% fall this week feels severe but could anyone claim to be surprised, given the current coronavirus news flow, if the decline soon became 16%?
As in the weeks after Lehman’s collapse, investors crave reassurance when none is possible yet. It is almost certain, so the experts tell us, that an effective vaccine will be developed within a year or so, but the idea that the spread of the coronavirus could trigger a global recession this year, as thinktank Capital Economics suggests, is plausible speculation.
So too is Goldman Sachs’ warning that US companies could record zero earnings growth this year if coronavirus becomes widespread. Wall Street’s spreadsheets currently contain no projections remotely close to that outcome.
Equally, of course, it’s hard to estimate how much gloom is already priced in. China-reliant supply chains are creaking, as Apple and Microsoft and others have warned, but the hard-to-measure rate of recovery is what matters on that front.
It is, though, possible to say central bankers won’t be much help to investors or the economy any time soon. They, like everybody else, don’t know the scale of what’s coming. In any case, as Sir Jon Cuncliffe, a deputy governor of the Bank of England, said, monetary policy can’t do much about a “pure supply shock”, such as goods not arriving in the UK. Investors, one could say, are even more than in the dark than they were in 2008.
Persimmon shareholders have dodged a bullet
David Jenkinson will depart housebuilder Persimmon with shares in the company worth roughly £45m, his prize from the same absurd incentive scheme that bestowed £75m on his predecessor as chief executive, Jeff Fairburn.
Perhaps Jenkinson, only a year after replacing Fairburn, wants to spend more time with his winnings. Or perhaps he’s just recognised what was blindingly obvious to outsiders: Persimmon’s claims to cultural reform, and its pledge to improve the quality of its houses, lacked credibility while a veteran of the old regime was at the helm.
Any doubt on the latter point evaporated with the damning independent report that the board, to its credit, published last December: in short, Persimmon had been building too many shoddy homes that had fire risks; box-tickers ruled the roost; and the company saw itself as “land assembler and house-seller rather than a housebuilder”.
Customers now come first, says chairman Roger Devlin, and, if you look closely at Thursday’s full-year numbers, there is circumstantial evidence to support the boast. An extra £213m was invested in “work in progress”, the cost of actually finishing the job, rather the handing homes to buyers when they’re full of snags.
Harder evidence of true reform, and commitment to reputational improvement, can only judged over time. It is why Devlin would do well to appoint a non-insider to replace Jenkinson. Better still, go for somebody from outside the housebuilding industry, an insular sector that enjoys nothing more than marking its own homework.
In the meantime, Persimmon’s shareholders should count themselves lucky. In a normally functioning market, there would be a heavy price to pay for pursuing a strategy that short-changed customers but made executives as rich as Croesus. Instead, Persimmon is still achieving pre-tax profits of £1bn and still has a return on capital employed of 37%. Help to buy has a lot to answer for.
Bonus first, results later at Reckitt Benckiser
How executive pay also works: jackpot rewards are handed out before the costs of the chief executive’s vainglorious acquisition emerge.
Rakesh Kapoor earned about £100m during his eight years at Reckitt Benckiser, the Dettol-to-Durex consumer goods giant, but it’s only now that shareholders can see how his big bet from 2017 turned out.
Mead Johnson Nutrition, a baby milk firm bought for £13bn, ruined Reckitt’s full-year numbers on Thursday with a £5bn impairment charge. The acquired business is decent, it’s just that Reckitt paid far too much. Kapoor’s team thought more Chinese babies would be born, the company told its shareholders with a straight face.
“We look forward to a new decade,” proclaimed new boss Laxman Narasimhan. So, presumably, does Kapoor in comfortable retirement.