SOMETHING DOESN’T ADD UP
Headline data has improved recently, so why are companies cutting staff? UK unemployment has fallen to 7.9 per cent and GDP grew by 1 per cent in the third quarter. Similarly, annualised US GDP was up to 2 per cent in the third quarter of this year, with unemployment also falling. But traders should be wary about headline data and the optimistic headlines it begets. Beneath the surface, there is still weakness.
Olympic ticket sales contributed 0.2 per cent to UK growth, and the unwinding of the effect of the Jubilee bank holiday in June added 0.4 per cent. US GDP growth was largely driven by defence spending. A rise in US consumer spending can be attributed to confidence in the job numbers; but employment is still not growing fast enough. Business investment and exports remain fragile, highlighted by recent purchasing managers’ data.
The Eurozone, China and the US fiscal cliff are the concerning factors, says Neil Gilbert of GFT Markets. “Corporates are preparing for the worst-case scenario.”
The uncertainty is infecting many sectors. Slowing demand from China contributed to poor earnings for both Dupont (which slashed 1,500 jobs) and Dow Chemical (which slashed 2,400 jobs). Given China’s importance to the global economy, this is concerning.
Chris Beauchamp of IG says that there is “crisis fatigue” but that Eurozone dangers still lurk – as the most recent German IFO business survey shows, which was the weakest in over two years. The crisis is taking its toll on companies like Ford, which announced 35,000 global job cuts. Peugeot will also cut 8,000 jobs.
The previously resilient tech sector has also seen a slew of companies downsizing: Zynga will shed 5 per cent of its workforce, and AMD up to 15 per cent. Siemens and Hewlett-Packard have announced 8,000 and 29,000 layoffs respectively. “Tech hasn’t escaped the uncertainty. The general malaise is affecting everything,” says Beauchamp.
The job cuts are sending a powerful message, says Mike van Dulken of Accendo Markets. Companies need to protect their margins, and cost-cutting is the way to do this. “We want shares to appreciate and dividends to be sustainable, even if that means jobs cuts.”
Traders must assess whether these companies and sectors are now more investable or whether this is a sign of more weakness ahead. Beauchamp says that “the classic reaction may be to short these sectors, and buy defensive equities”.
Gilbert is more optimistic: “Streamlined companies could be a buying opportunity. The US market has the backing of the Fed, which will prop up equities” once the fiscal cliff risks have subsided.
While the effects of layoffs is devastating for those affected, this sad necessity may result in leaner, more efficient companies.