Monday Musings: May 26, 2020

May 26, 2020


Public Trust Credit Team
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For the month of March, household savings rates across Europe’s largest economies rise well above long-term averages

Hopes of a consumer spending fueled economic recovery across European economies are unlikely to come to fruition in 2020 based on the most recent published data from the European Commission (EC) and current full-year forecasts. With the exception of Germany, four of Europe’s five largest economies saw a surge in bank deposits for the month of March as COVID-19 lockdown measures crippled consumer confidence. In the case of Italy, France, and the U.K., month-over-month growth in bank deposits for March was more than three times the monthly average dating as far back as 2003. The EC now estimates household savings as a percentage of disposable income could reach as high as 19% this year, a sharp increase from 12.8% in 2019. As lockdown measures forced businesses to temporarily shut their doors and consumers to stay home, private consumption throughout Europe has fallen by roughly one-third since Q4 2019. While the easing of lockdown measures is likely to spur a small rebound in consumer spending habits over the coming months, the severity of Europe’s economic downturn and ensuing rebound will remain highly contingent on exactly how long consumers opt to hoard cash and defer spending.

Hertz files for Chapter 11 bankruptcy protection, the latest victim from the economic shutdown due to COVID-19

Hertz, the car rental company, is the latest well-known company to file for bankruptcy protection after the recent filings from Neiman Marcus, J. Crew, J.C. Penney, Gold’s Gym, and Pier 1. The collapse in consumer demand associated with stay-at-home orders and mandatory closure of non-essential businesses across the country have hit many retailers hard, especially as many companies have already been facing challenges as consumers increasingly move to online shopping. With the gradual reopening of the U.S. economy, social distancing measures are expected to remain in place for some time, limiting capacity and profitability for retailers. 
Much like the airline industry is fundamentally dependent on travel, the rental car industry has seen a precipitous drop in revenues and bookings due to COVID-19. Driven by a dramatic decrease in the number of people commuting and traveling due to nationwide shutdowns, fewer auto accidents have dramatically reduced the demand for rental cars. However, the rental car industry had already been facing fundamental changes due to increased competition from convenient ride-sharing apps (Uber, Lyft, etc.). Secular shifts in conjunction with the economic shutdown have pushed some companies to distressed levels with the expectation of more to follow.

COVID-19 has not stopped Hong Kong from taking to the streets

As Beijing dramatically steps up pressure on Hong Kong, a resurgence of the fierce pro-democracy protests seen last summer started this week. The People’s Congress is set to rubber-stamp a new national security law that will use a legal loophole to bypass a confirming vote in the Hong Kong legislature. Among the provisions, the law includes curbs against foreign influence, succession, and terrorism as well as the operation of its free press. The bill also allows the Chinese secret police and other intelligence agencies to operate with much more freedom in Hong Kong, the most worrisome for the city’s citizens. When Hong Kong was given back to China in 1997, Beijing agreed not to fundamentally change anything about the area under the “One Country, Two Systems” idea. This agreement is what underpins the city’s special trading status with the U.S. and other countries, so Beijing has been proactive in trying to allay concerns that this will affect Hong Kong’s trading autonomy.
The move comes amid several U.S. bills to hit back at China over the COVID-19 pandemic. The U.S. is in the process of getting its pensions to divest of all mainland China equities, citing a lack of transparent accounting policies and high volatility. The second approach the U.S. is pursuing is to require U.S.-listed Chinese companies to have their audits reviewed by U.S. regulators. For companies that are not fully or partially state-owned, like Alibaba, it will not be much of issue. However, China has already stated that it will not allow audits of state-owned enterprises to be reviewed, so if the legislation passes the House, it could set up another stare down between the two powers. 
Last week, the U.S. raised the temperature on Huawei, issuing an executive order requiring companies that use U.S. technology to build components for Huawei to cease or apply for a special license. Taking all of this into account, it is worth noting that the U.S. Office of the Trade Representative has delayed its report on the autonomy of Hong Kong from the mainland in response to how seriously they believe this legislation could affect the region’s separation. As one of the largest financial centers in Asia, the special trading status given to the city by western governments is paramount to its performance and could affect the operations of large financial institutions like HSBC if it is revoked.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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