Monday 22/06/20

  1. In MARKETS & MACROECONOMIC NEWS, we see that US markets aren’t just rising on Big Tech, Sunak is on the cusp of cutting VAT and UK takeover rules look likely to change
  2. In INSURANCE NEWS, Directors’ and Officers’ insurance prices rise, companies are delaying life cover and the industry goes on trial
  3. In INDIVIDUAL COMPANY NEWS, North Face blocks Facebook, JD Sports’ Go Outdoors faces administration and Wirecard’s problems deepen
  4. AND FINALLY, I bring you a Covid-ready rollercoaster…



So the market rally is broader than Big Tech, Sunak looks at the VAT route and UK takeover rules look like tightening…

More stocks are driving market rally, decreasing reliance on Big Tech (Wall Street Journal, Caitlin McCabe) shows that although Big Tech stocks have helped markets bounce strongly, it seems that other stocks are now taking the baton and contributing to ongoing momentum. Interestingly, over 97% of stocks in the S&P traded above their 50-day moving average (a measure used to track the breadth and momentum of market moves). This is the highest level since at least June 2010 and is about double the percentage in May. Another “technical” measure – the NYSE advance-decline line (which gives you the number of all securities rising minus the number falling every day) – has just hit its highest level for at least two years (i.e. the difference between risers and decliners continues to widen). * SO WHAT? * I think that this is interesting stuff to note – especially if you are trying to make an argument to support the opinion that market strength is broad-based. However, the big difficulty with all of this is that these measures have worked historically – but current circumstances are unique and global in nature. There is a risk, IMO, that many companies are being held together at the moment by a combination of government subsidies, whatever money the company has in the bank – and gaffer tape. Things could change quickly and violently depending on which schemes wind down first and how consumers behave. I am not a betting man, but I would stick with tech.

Sunak set to follow VAT stimulus with autumn tax rises (Financial Times, Chris Giles, Jim Pickard, Daniel Thomas and Sebastian Payne) shows that the chancellor is thinking about potentially cutting VAT to 15% for at least some industries (particularly those involved in leisure – such as pubs, restaurants and hotels) as early as next month, but this may be balanced out by other tax rises and cuts in public spending.

In UK to tighten takeover rules for groups vital to virus response (Financial Times, Sebastian Payne) we see that the UK government will, later on today, announce an immediate tightening of takeover laws in order to protect key businesses from foreign buyers. Companies involved in the manufacture of protective equipment and those in the food supply chain are seen to be vital in the pandemic response but are also having a tough time financially and could be vulnerable to takeover. The new measures are to be voted on today and, if all goes well, they will come into force tomorrow. Interestingly, this is an additional shorter-term measure to the upcoming National Security and Investment bill (NSI) that will give the government broader powers of blocking/intervening in takeovers – particularly from China. * SO WHAT? * This sounds like an OK-ish idea in theory, but it will depend on whether by implementing the measures the government is just going to restrict the number of potential buyers or whether it is going to somehow compensate target businesses with actual money. If it is the former, then such a move could contribute unwittingly to a slow death for these companies – but if it is the latter, it will be less bad. The devil will be in the detail.



D&O insurance premiums rise, life cover gets delayed and the industry goes to court in the UK…

Companies are paying a lot more to insure their directors and officers (Wall Street Journal, Alice Uribe and Leslie Schism) shows that many companies in the US and Australia are having to pay much higher rates to cover their top execs (this insurance is often referred to as “D&O insurance”, as in Directors and Officers). Demand for this type of insurance is rising due to increased incidence of shareholder litigation both in terms of frequency and size of settlements. Also, litigation finance firms are also getting more involved these days, meaning that complainants are getting better funded. US premiums have risen by 104% in the first quarter versus the same time period last year, according to AON and Marsh & McLennan while premiums in Australia have risen by a whopping 225% over this quarter! * SO WHAT? * D&O insurance is a key insurance product purchased by publicly traded companies and is there to cover claims filed against top execs and other employees if the company doesn’t pay the costs itself. Premiums in the US and Australia have risen particularly strongly because there is a history of more litigation against companies. Companies are just going to have to factor in this higher cost because future litigation risk is just so unpredictable – but this is obviously easier said than done.

Insurers are delaying life cover over Covid-19 concerns (Financial Times, Anna Gross) highlights an emerging pattern of behaviour where insurance companies including

Aviva, Royal London and Legal & General are keeping applications on hold for up to three months if applicants say they are at risk of contracting Covid-19. Applicants are being asked a) whether they are currently experiencing any symptoms, b) whether they have tested positive for the virus and c) whether they’ve been in contact with someone who could have the virus. * SO WHAT? * I guess you can’t blame the insurers for asking these extra questions to protect themselves (they aren’t charities, after all), but such moves make life very difficult for healthcare professionals. As the president of the hospital doctors’ union said, on the one hand they recommend getting tested, but on the other hand they have to warn them of the financial repercussions of taking a voluntary test. This is a tricky situation indeed.

Then I thought I would highlight Insurers vs small businesses: a high-stakes battle over lockdowns (Financial Times, Oliver Ralph and Robert Armstrong) because it flags the forthcoming reckoning between the insurance industry and small business at the High Court next month over who’s going to pay the bill for the coronavirus pandemic – all under the wing of the Financial Conduct Authority (FCA). This will centre on whether business interruption policies cover coronavirus lockdown-related losses. * SO WHAT? * The FCA has brought this test case to hasten a solution to the argument, which may help to save businesses who would otherwise have been unable to stay the course. The world will be watching as litigation on this is becoming more of an issue everywhere. One thing worth bearing in mind, though, is that even if complainants win they will still have to wait for the companies to decide the correct level of payout. As far as the insurers are concerned, though, a loss would mean a total claims bill of over the $100bn that Lloyds of London has forecast – so there is a huge amount at stake.



North Face boycotts Facebook, JD Sports’s Go Outdoors faces an uncertain future and the misery continues for Wirecard

North Face joins Facebook advertising boycott (Daily Telegraph, Olivia Rudgard) shows that outdoors brand The North Face is joining a growing advertising boycott in protest against Facebook’s handling of misinformation. Momentum is gathering to pressure Facebook’s chief exec Mark Zuckerberg to combat racism and incitement of violence on his social network. The #StopHateforProfit campaign was launched last week and has asked members to pause advertising on Facebook and Instagram during the month of July. It’s too early to know whether or not this will actually result in anything, but it is worth monitoring.

Talking about outdoor brands, JD Sports’ Go Outdoors brand likely to enter administration in days (The Guardian, Kalyeena Makortoff) shows that JD Sports is on the verge of appointing administrators for its Go Outdoors brand within the next few days, putting the jobs of over 2,000 employees on the line. The brand specialises in fishing, cycling and camping gear and store sales are at its core and represents about 5% of JD Sports’ annual turnover. The sports retailer bought the outdoor brand in November 2016 for £112m. * SO WHAT? * It’s not the first retailer to go into administration during the pandemic (Oasis, Warehouse, Laura Ashley and Debenhams have come before them) – and it certainly won’t be the last. More gaps on the high street then 😢

I mentioned the Wirecard debacle last week, but Wirecard’s €1.9bn never entered Philippine financial system, bank governor says (Financial Times, Dan McCrum, John Reed, Olaf Storbeck and Stefania) adds more ridiculousness to the whole story. Wirecard’s chief exec resigned on Friday. What a complete mess. The whole shambles rolls on.



…in other news…

In this socially-distanced world in which we find ourselves, we are all looking for little ways to get back to normal. I have to say that I think that this is one of the more unusual measures I’ve heard of recently: No screaming allowed on Japanese roller coasters, and new video shows it can be done (SoraNews24, Casey Baseel This is so funny IMO – you have two senior execs of the theme park and parent company trying to look unperturbed whilst being thrown around in a rollercoaster! I personally find shouting loudly/hysterically helps to keep the contents of my stomach in, but maybe that’s just me…

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Some of today’s market, commodity & currency moves (as at 0749hrs green is up, red is down). THIS IS INTENDED AS A ROUGH GUIDE ONLY!

FTSE 100 *Dow Jones *S&P 500 *Nasdaq*DAX *CAC-40 *Nikkei **Shanghai **
6,293 (+1.10%)9,94212,331 (+0.40%)4,979 (+0.47%)22,455 (-0.10%)2,965 (-0.08%)
Oil (WTI) p/bOil (Brent) p/bGold Per t/oz£/$€/$$/¥£/€$/₿

(markets with an * are at yesterday’s close, ** are at today’s close)