Life after Lockdown: Contemplation of a New Sort of World

James Penn
April 14, 2020

Two weeks ago I wrote about the shock of living through one of the worst stock market crashes of all time – to rival those of 1987, and even 1929.

After the shock comes the resignation, and the contemplation of a new sort of world.

The pain to investors, in the form of market losses and dividend cuts, has also followed. The latter have been dramatic, with about 100 UK companies announcing dividend cancellations or suspensions. In some cases these have been after the company has declared the dividend, but before the dividend has gone ‘Ex Div’. This sort of action has precedents.

However, in many cases we have seen dividends axed after the ‘Ex Div’ date – or the date when a dividend normally becomes a contractual payment. This is almost unprecedented – the only example I can think of is of Northern Rock, the former UK bank, which axed its dividend in 2007 after being nationalised by the Government following the ‘run’ a few months beforehand. Northern Rock shareholders were furious, claiming they were legally due the payment, but this action was surely right given the bank was bust and no longer a going concern.

Particularly painful in this respect was the cutting of the UK bank dividends – by all five of the major listed UK banks on Tuesday 31st March. The Barclays dividend had already gone ‘Ex Div’ and was due to be paid out on the Friday, but this didn’t happen.

The banks made good profits last year, and were more than able to make the payments, with capital ratios all perfectly adequate. However, the Prudential Regulation Authority (PRA) essentially forced the banks not to go ahead with the payments, partly to shore up cash and balance sheets so the banks can extend credit during the downturn, and partly because they felt it wouldn’t ‘look good’ for banks to be making dividend payments to investors during the worst economic shock in years.

The Asian banks – HSBC and Standard Chartered – must have felt aggrieved, as they have little in the way of UK operations (particularly Standard Chartered) and yet – because they are headquartered here for historic reasons – were snared in this regulatory catch-all.

The economic situation is rapidly deteriorating with over 16 million Americans signing on as unemployed in the space of just three weeks, a rise that hasn’t been seen before – not even in the 1930s.

The US hasn’t gone for the ‘employment preservation’ strategy pursued by the UK and Europe, where governments have agreed to pay 80% of employee salaries for the next few months while the employers are in straitened circumstances.

In this respect, the word ‘furlough’ has recently entered the British vocabulary – a word I was only previously familiar with in respect of the US. To ‘furlough’ someone is to put them on reduced hours at lower rates of pay, without actually firing them. This is now becoming a regular feature at many UK firms.

Employment growth has been one of the few success stories in the UK over the past decade, so this is a big disappointment. Unemployment could rise to 10% over the next two months, higher than the 8% level it reached in 2008, if things continue deteriorating at this rate.

It could stay high after that, even assuming an eventual return to a post-COVID normal, if companies start to think they’re able to manage with less people, or if they can’t pay salaries with revenues permanently lower.

From here it’s difficult to see what will happen.

When the history books come to be written, there will be debate on whether the ‘lockdown’ was the right strategy.

Sweden and Japan didn’t follow the rest of the world with lockdowns, allowing free movement to continue, but their COVID-19 cases have been no worse than other country’s.

So has the West just inflicted a massive body blow to its economy for no apparent additional health benefit?

Of course, this is one of those ‘counterfactuals’ to which we will never know the answer.

But having taken the lockdown strategy thus far, governments will need to pivot towards getting the economy back on stream as soon as possible. Otherwise, we will soon see a huge, permanent drop in living standards.

By May, health services should have the necessary PPE, ventilators and the equipment for mass testing for COVID-19. So there will be the capacity for new cases to be treated, and the NHS won’t be overwhelmed. People should be able to go about their normal lives, albeit they may be wearing face masks for the first time.

The model for life post-COVID-19 could be post-Second World War Britain. Private investment will be lacklustre after the hit it has just taken, and companies will need to spend their time, energy and money on rebuilding balance sheets and liquidity, and in reinstating dividends. The government will need to invest more instead.

But the 1940s was a pretty raw time for most, with the economy only just emerging from its wartime rigours and troubles.

The past decade could look like ‘austerity-lite’ relative to what’s coming.

Disclaimer: The views thoughts and opinions expressed within this article are those of the author, and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security.

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