Confidence is everything

1-Oct-2008

With words like Armageddon and meltdown used commonplace, putting the last week of financial turmoil in perspective is difficult. If banks won’t lend to each other, the rest of our working economy is threatened and, given the global reach of the banking system, much is in jeopardy. Apart from headline-grabbing speculation, last week’s movements were about confidence. This is the real threat. With confidence dented, buying (and saving) behaviour by individuals and businesses changes. How many companies delayed projects this week or households reduced spending? These are the factors taking us into recession.

If banking liquidity eases we still enter recession but if not, that recession will prove much deeper and longer, as the actual and perceived problems multiply their impact across the wider economy. So liquidity needs fixing and, as the UK government facilitates a controversial takeover of HBOS by LloydsTSB, the US government wants a $700bn (£380bn) kitty to buy-in those dodgy loans that appear to have led us all to the cliff edge. Unsurprisingly, with Congress negotiations on a knife edge, financial markets remain extremely jittery. Furthermore, while UK economic fundamentals worsened as inflation and unemployment rose there are now some positives. Although 4.7% inflation restrains the Bank of England, falling oil and cereal prices plus flat earnings growth should ease cost-push inflationary pressures, while a halving of retail sales growth since spring and declining manufacturing output foretells a downturn. This may enable an interest rate cut soon as the need to stimulate the economy becomes critical.

Meanwhile, whatever happened to long-term fundamentals? As unemployment rises the recruitment sector is still perceived as cyclical. Adecco’s retreat from Michael Page may switch attention to Hays or Robert Walters, but few are brave enough to buy in on fundamentals. Recession will lead to consolidation, by failures or mergers, providing opportunity for the strongest players. Latest results suggest a general weakening underway and those companies most ‘immune’ are either in specialist public sector markets cushioned from discretionary spending or active where technical skill shortages, niche needs and solid demand combine, preferably underpinned by longer-term funding such as large infrastructure projects. HCL and Morson both fit that bill but even with many other solid recruitment companies out there at historically low multiples, who’s looking at fundamentals?

PS. Penna just reported strong growth — it seems out-placement is back in vogue.

Sue Dodd, director, Agile Intelligence

www.agile-intelligence.com