Coronavirus could wipe £170 billion off U.K. corporate profits in the space of 18 months but the stock market crash is a “clear overreaction,” according to financial data giant Link Group.
U.K. corporate earnings were already in recession before the coronavirus impact, with the first quarter being the third consecutive quarter of profit declines, the company’s report found — with U.K. profits in the past year a third lower than in 2007.
It predicted a 75% decline in U.K. company profits by the autumn this year, before a bounceback in 2021, a hit of £170 billion — equivalent to a year’s profit — over 18 months.
“The pandemic has huge social and economic consequences. Firm evidence of how companies are faring will take time to emerge; even profit warnings will only be of marginal use given the rapidly moving situation. This is why the stock market is showing such volatility,” Susan Ring, Chief Executive of Link Group’s corporate markets unit, said.
The coronavirus pandemic and the near-global lockdown has caused U.K. stocks to plunge so far in 2020. The FTSE 100 UKX, -0.98% has fallen 25% year-to-date, while the FTSE 250 MCX, +0.98% has slumped 28% in 2020. The country has been in lockdown for more than two weeks and the hospitalization of Prime Minister Boris Johnson has caused more uncertainty over when and how measures might be eased.
Link Group said close to £800 billion had been knocked off the value of U.K. companies but the slump was too severe, particularly as most of the value of a share derives from a company’s ability to deliver profits over 15-20 years, not just one year or so.
“If the damage from the crisis is short-term, and if profits start to rebound later this year, then the elimination of almost £800 billion of value from U.K. stocks during the crash is a clear overreaction to the loss of perhaps £170 billion of profit,” Ring said.
“All this doesn’t mean the market cannot continue to fall for now. Moreover, if we are set to endure a protracted slump, then our estimates for profit are likely too sanguine. But the recovery will come,” she added.
Link Group looked at the 2008-09 recession and the last collapse in oil and commodity prices, also factoring in sector specific issues affecting retail, leisure and travel to come up with the figure of a £170 billion profit hit. The data company also grouped sectors in different risk categories through the coronavirus recession. Oil and gas, mining and airlines, leisure and travel sectors were in the high risk red zone, while food and drink producers, insurers, food retail and health care were in the low risk green zone.