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What a looming UK jobs crisis means for stocks
The UK is on the cusp of a serious unemployment crisis. In recent weeks thousands more job cuts have been announced by major employers and the real pain is probably still to come with the conclusion of the furlough scheme in October.
Widespread unemployment, expected to hit levels not seen since at least the 1990s, will impact the stock market in several ways.
First there is the question of what major redundancies will mean for individual companies and second, for the UK jobs lost, there is the read-across to shares which are exposed to the consumer economy.
In June think-tank The Institute of Employment Studies observed that the number of claims for work benefits had risen by 1.6 million since March. By its reckoning this is a faster rate than was seen during the Great Depression in 1929.
Recent updates from recruitment agencies aren’t that encouraging either. PageGroup (PAGE) saw UK gross profit fall 62% year-on-year between April and June. Both PageGroup and its peer Robert Walters (RWA) have announced job cuts of their own – 531 and 200 respectively in the second quarter.
Some of the big job cuts announced so far
HSBC - resumption of plan to cut 35,000 jobs worldwide – ‘meaningful number’ in UK
BP - 10,000 global job cuts, reported to be 2,000 in the UK
Rolls-Royce - 9,000, including 3,000 in the UK
SSP - 5,000
Centrica - 5,000
Boots - 4,000
Travis Perkins - 2,500
Johnson Matthey - 2,500
Royal Mail - 2,000 management roles
John Lewis - 1,200
If people are out of work, they will not have the disposable income to spend on non-essential items, or to go out for food, drink or entertainment, hampering the recovery of hospitality, leisure and retail businesses already reeling from lockdown.
The danger is that we see a vicious circle with a drop in demand for these sectors leading to more job losses for the firms which operate in them, thereby feeding into further reductions in demand.
Makers of consumer staples such as Unilever (ULVR) and Reckitt Benckiser (RB.) and supermarkets should be better positioned as they sell essential items. However, investors will need to watch carefully for any signs that shoppers are trading down to non-branded goods or switching from their usual supermarket option to a cheaper alternative.
The measures announced in Chancellor Rishi Sunak’s mini-Budget (8 Jul), including a £1,000 bonus for companies who retain currently furloughed staff and a discount for going to a restaurant in August, seem unlikely to do much to change the general trajectory of the jobs market.
The unemployment picture could even outweigh the benefit to the housing market from an increase in the stamp duty threshold to £500,000.
You also need to consider the potential disruption from Brexit at the end of the transition period on 31 December 2020.
‘REAL CHALLENGE’ WHEN FURLOUGH ENDS
In response to measures introduced by Sunak, Andreas Billmeier, sovereign research analyst at fixed income investment manager Western Asset, said: ‘The overall envelope (announced by Sunak) is not particularly large by international comparison and effective spending will be markedly below the headline number.
‘We think that the real challenge will come when the furlough scheme runs out, and structural change in the economy due to this pandemic but also the fallout from Brexit could cause a marked increase in the unemployment rate. We don’t think the announced retention bonus will have any impact on those structural forces.’
The impact on share prices when job cuts are announced
In ordinary times firms might expect job cuts to be received positively by the market because it signals cost savings which are beneficial to profits. However, there are reasons why we have seen a different response as businesses react to the coronavirus crisis.
First, it’s worth noting that recent news on jobs will have probably been accompanied by disappointing updates on trading which will have in turn influenced the share price reaction.
That speaks to the reality that these are not proactive cuts being made to a bloated workforce by new management intent on creating a more efficient business. These are companies being forced to react to a major and sharp drop in demand.
There are tangible upfront costs to redundancy programmes as departing staff get the financial packages owed under their contracts and less immediately perceptible long-term costs. These include a potential dilution of the quality of a group’s product or service as they lose skilled employees.
When Shares spoke to Reach (RCH) chief financial officer Simon Fuller in the wake of an update revealing the loss of 550 roles at the newspaper publisher, he was adamant the cuts wouldn’t impact the distinctiveness and quality of its regional and national titles. However, a double-digit decline in the share price on the news suggests investors weren’t necessarily convinced.
Other issues to consider with companies cutting jobs is that there are future costs to hiring and training new staff to replace those lost at a time of acute financial pressure if and/or when demand returns.