I’ve been paying close attention to equity markets over recent weeks, as I rebalance my portfolio to help me to buy a house. I’m struck by how badly numerous stocks have done since their 2015 highs.
The major markets overall are essentially flat on a year ago (UK down 1%, US up 1%, Australia up 3%).
But calling 2015 flat ignores the fact that during the year we were treated to some significant gains, before sharp drops in August and December. FTSE-100 breached 7100 (now at 5960), S&P got to 2130 (now 1923), ASX-200 rose 10% to almost 6000 (now 4925) and DAX reached 12,400 (now 10,000). Overall then the markets are 15-20% down from their peak. This decline is between a third and half of the declines experienced in 1987, 2000-2 and 2008-9 (the UK copped it worst in 2000 and the US’s worst bath was 2008-9).
What strikes me is not how bad 15-20% feels, but how truly terrible some specific declines have been among some so-called blue chip stocks. Ones that I am bruising over include:
- Pearson (PSON). Down 55%, from 1508 to 680, mostly down to one profit warning. Apparently the US education market isn’t what it might have been.
- BHP Billiton (BLT/BHP). Down 63%, from 1644 to 609. The woes of the commodity sector have been well explored, and BHP has tracked the sector.
- Royal Dutch Shell (RDSB). Down 42%, from 2315 to 1341. Arguably this industry titan has been let off relatively lightly.
- Tesco (TSCO). Down 65% from 386, just before the wheels came off, to as little as 137 very recently. As well as its £200m restatement of earnings, both Tesco’s strategy and culture are under attack. It can’t be as bad as they say, surely?
- HSBC (HSBA). Down 29% from 675 to 478. The clue is in the name; when the Chinese market sneezes repeatedly, this bank catches at least a cold.
- Caterpillar (NYSE:CAT). Down 45% from 110 to 61. This is a Dividend Aristocrat; these very rarely offer reduced-by-45% price drops. Yet its Chinese exposure has hit it hard. And based on my travels around Asia I would say it has clone competition from local rivals. How hard is it to manufacture diggers, actually?
- Home Retail Group (HOME). Down 60% from 219 to 87. Though recently right back up around the 150 point due to M&A interest from J Sainsbury’s.
- Rolls Royce (RR). Down 52% from 1061 to 505. This well-known manufacturer of profit warnings has a new CEO, Warren East, from ARM. He inherits an impressive order book but a strategic and financial conundrum.
- Aberdeen Asset Mgmt (ADN). Down 52% from 510 to 245. More Chinese-inflicted injuries for this Asian-orientated asset manager.
This is a range of hitherto well-regarded businesses that are down 40-65%. Are they now blue chip bargains? Or has lasting damage been inflicted to their competitive positions and opportunities?
One common theme behind this value destruction is China, and the wider Asian market, which have not had a good year.
Another theme is the slump in commodity prices, which clearly hits oil majors like Shell and commodity miners like BHP.
Perhaps yet another theme is the changing retail landscape, with the (not online at all) German discounters and the mighty (online-only) Amazon both tearing strips out of the (mostly multichannel) incumbents.
And yet. This doesn’t explain Tesco’s fraudulent restatement, nor Pearson’s trauma, nor Rolls Royce’s predicament. It doesn’t really explain Home Retail Group, when John Lewis has been thriving. And the range and diversity of these victims is striking.
It feels like everywhere I look I see wounded giants. Ones which I felt were solid investments. With the injuries they’ve suffered, I am starting to feel grateful that the market indices haven’t tumbled further.
What happens next? If only one could say. I can make bear and bull cases for most of these victims.
The bear case says that China’s stumble becomes a fall. And that commodity prices fall even further. And that anybody with Hong Kong in their name, or Asia as their USP, or capex budgets as their target, faces ongoing decline in top line and decimation in their bottom line. Stay well clear of HSBA, Aberdeen, Caterpillar, any oil majors, any miners, and so forth.
The bull case says that blue chip businesses have inbuilt resilience, diversification, brand strength etc; they will adjust their posture to cope with slower Chinese growth, and we will look back on missed opportunities to buy Tesco at 140, Caterpillar at $60, Pearson at £7, Rolls Royce at £5.50 and weep.