Apple’s warning shouldn’t be a surprise, and HSBC plans big cuts

“It’s a red day for markets amid a wave of corporate news. HSBC’s huge job cuts plan, Apple’s coronavirus-related warning and talk of Donald Trump once again stepping up the trade war with China have served to knock investor confidence,” says Russ Mould, Investment Director at AJ Bell.

“The FTSE 100 fell 0.3%, primarily because of negative market reaction to HSBC’s latest results, as well as weakness in the mining sector.

“Japan’s Nikkei 225 index fell 1.4% with the technology and telecoms sectors worst hit.

“Oil prices fell by 1.5% to $56.79 per barrel while the pound fell 0.2% against the US dollar at $1.2978."

Apple

Apple’s warning that coronavirus disruption in China will hurt its sales should not come as a surprise.

“Markets have been far too complacent about how China’s woes would have a direct impact on supply chains for a large number of companies around the world. If factories are closed, are running at partial capacity, or are struggling to get raw materials to make goods, then it is no wonder that supplies will be disrupted.

“Apple’s retail stores will have also been affected by the health incident in China and surrounding areas in Asia as there will have been fewer people shopping.

“Companies try to avoid tying up cash by having large stockpiles, even though that would help them to continue operating as normal at such times of supply chain disruption. Instead, they prefer to have the smallest amount of inventory possible in the hope that the supply chain always runs smoothly. That leaves little room for error, as Apple has now discovered.

“Stock markets are normally good at pricing in events such as risks to earnings – but sometimes the markets behave in an odd way. Apple’s share price has been fairly resilient since the coronavirus outbreak started to spread beyond China last month, which is the market’s way of saying the company should not be badly affected.

“Markets in general have been fairly optimistic in recent weeks with only a handful of the major stock market indices in negative territory year-to-date.

“Apple’s earnings warning will therefore cause shock waves across global markets and perhaps prompt investors to think again with regards to how the coronavirus could hurt corporate earnings on a wider scale.”

HSBC

HSBC’s situation could be the plot of a Hollywood movie – a large supertanker veering off course with no-one at the wheel. Will there be a Hollywood ending with someone coming to the rescue of Europe’s largest bank?

“It seems perverse that the business currently has an interim CEO in charge, in Noel Quinn, just when it is launching a major restructuring. The argument appears to be that the board want to get their house in order before appointing a new leader.

“Whoever is ultimately appointed as CEO will have ideas about the business and where it needs to go and they may not match the current agenda.

“The company is looking to make major savings, with plans to cut tens of thousands of jobs and dial back on costly investment banking activities in the US.

“There may be disappointment that, unlike some of its peer group, the company is not freeing up capital to return to shareholders. In the longer term its decision to reinvest in areas like retail banking and wealth management in Asia may bear fruit.

“While a 30% drop in profit is not going to win any plaudits, today’s numbers were actually reasonable on an adjusted basis – even if its performance on costs was a little worse than expected.

“However, 2020 revenue is already expected to be lower without factoring in any impact from the coronavirus which is heavily affecting some of the bank’s core markets. HSBC’s next captain will certainly have to navigate some turbulent waters.”

These articles are for information purposes only and are not a personal recommendation or advice.


The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.


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