Shares could be at lowest

15-Oct-2008

An unforgettable few weeks for the UK economy and equity markets, which have been characterised by extreme volatility, banking collapse and, finally, aggressive government intervention. At times we have experienced echoes of the 1920s/1930s, as some queue to empty their bank accounts and hoard cash or gold. Parts of Europe are already in recession and, if not already, the UK will follow soon.

However, the part-nationalisation of UK banks and a co-ordinated global reduction in interest rates may mark a turning point. For many months, companies have been charged punitive interest rates of up to 11% when renewing borrowing facilities with their lenders. The bank bail-out means the credit markets can start to return to normality, which must be of great comfort to corporate treasurers eyeing imminent refinancing. Although rate cuts send a much needed psychological signal, additional action will be needed to convince companies and consumers that politicians have grasped the severity of the crisis.

Recent trading updates from Michael Page, Hays and Robert Walters all confirm that the traditional seasonal recovery in demand in September has been much more muted this year. UK net fee growth at Michael Page deteriorated from +1% in Q2 to -8% in Q3 and September was described as “the toughest month we have seen for a while”. Similarly, Hays UK also reported -8% net fee growth over the same period (from +4% in the previous quarter), as weak accountancy & finance and construction revenue offset 15% growth in the public sector.

Staffing share prices have edged back down to levels last seen in mid-July when investors were last preoccupied with recessionary fears. As we flagged at that time, the downside to share prices could be more limited from here as many stocks are now factoring in a 2003/4 style recession. Moreover, the sector prudently avoided the excesses of the credit glut, so balance sheets are in good shape and we are likely to avoid the toxic cycle of banking covenant fears and rescue fund raisings.


Kean Marden, head of UK research, Kaupthing Singer & Friedlander.


Columnist’s note

By the time you read this article my firm will have rebranded following the demise of our majority shareholder KSF. Kaupthing Singer & Friedlander Capital Markets is well capitalised, sits outside the administration process and continues to publish research, talk to institutional clients and make markets in over 300 companies.