- 55% of companies in the FTSE 350 index of UK stocks have not recovered from the Covid market crash four years ago
- Travel and property-related stocks among the laggards
- Many pandemic winners have seen a slump in demand over the past two years
- Why the UK stock market has lagged
- Why so many companies have failed to recover
Dan Coatsworth, investment analyst at AJ Bell, comments:
“Fifty-five percent of the FTSE 350 has not recovered from the Covid-induced stock market crash in February 2020, even though the bulk of major market indices globally are now trading above that level.
“According to analysis by AJ Bell, at the time of writing 194 stocks in the FTSE 350 and 142 stocks in the S&P 500 are still trading below the level on the eve of the market crash four years ago. We have taken 21 February 2020 as the record date as that was the last trading day before the global market correction kicked in.
“The FTSE 350 index as a whole has recovered all of its losses and is now trading at exactly the same level as the eve of the market correction, while the FTSE 100 is trading 2% ahead.
“Foreign markets have fared much better. The Nasdaq Composite index in the US is up 66% while the S&P 500 is trading 50% higher. France’s CAC 40 is 29% ahead and Germany’s DAX has advanced by 26%. None of the calculations include dividends.
“This goes to show the benefit of having a diverse portfolio and making sure you don’t have excessive concentration on a single stock market in the world.”
Examples of stocks that are trading below pre-Covid crash levels:
“Ocado is a prime example of a stock that’s been left behind. The pandemic shone the light on the need for grocers to have sophisticated logistics and warehouse operations to support online shopping and make the process of selling via the internet efficient and profitable. In effect, Covid handed Ocado the biggest sales opportunity in its lifetime and the company blew it.
“Ocado had an easy sales pitch to sign up more grocers to use its warehouse system but progress has been incredibly slow in terms of new business wins. The rise in interest rates also had a negative impact on the valuation of future cash flows which is important given that Ocado is more of a ‘jam tomorrow’ than ‘jam today’ story.
“Elsewhere, certain stocks lacked the drive to bounce back from the pandemic such as Vodafone, which failed to grow. Others experienced a pandemic hangover such as Walgreens Boots Alliance as it struggled with weakening demand for Covid vaccines and rising competition.”
Why the UK stock market has lagged:
“The shape of the UK stock market is a contributing factor to why so many companies in the FTSE 350 have lagged in the post-Covid recovery. The big gains globally over the past few years have been in the technology sector which is grossly under-represented on the London Stock Exchange.
“The UK is more dominated in areas like telecoms, housebuilding, property, tobacco and life insurance, all of which have disappointed on a sector basis since the onset of Covid.
“However, the US also has its fair share of laggards including the travel sector which has experienced a volatile comeback from the pandemic, and the healthcare space which has faced a multitude of challenges from uneven demand, production delays and supply chain problems.”
Why so many companies have failed to recover:
“There are multiple reasons why so many share prices have languished over the past few years and failed to fully recover. For certain companies, financial gains made during the pandemic effectively brought forward earnings growth and this demand momentum has now fizzled away, making it harder for these companies to sustain earnings growth.
Pandemic gains unsustainable
“Certain drug companies prospered from the pandemic thanks to developing vaccines. They managed to keep the momentum going until last year when it became clear that income from Covid-related treatments was not the golden goose previously thought.
“Pfizer and Moderna have both said in recent months that sales from Covid treatments would be much less in 2024 than in previous years. Shares in Pfizer are now trading at the same level as the lowest point in the February/March 2020 global market crash. As for Moderna, its share price rallied hard for a year after unveiling its Covid vaccine in 2020 but the bulk of those gains have faded away. Nonetheless, its shares still trade above pre-Covid levels.
“Interestingly, the pharmaceutical sector is experiencing divergent fortunes. While Pfizer and Moderna are in the doldrums, companies with exposure to weight-loss treatments have enjoyed a share price rally. There might be more similarities with the pandemic than you think. Investors initially scrambled to own stocks exposed to Covid treatments in the belief that earnings would soar. The same now applies to weight-loss treatments.”
Work from home trend is fading away
“Builders’ merchant Travis Perkins looks to be one of the companies nursing a hangover as home improvement projects become less important as more people go back to the office for work. The ‘do it for me’ scene boomed after lockdown as homeowners wanted tradesmen to spruce up their houses and flats. This trend has since lost momentum and Travis Perkins has also suffered from a downturn in the construction market led by weaker new-build housing.”
Struggling with higher interest rates
“Supply chain problems during the pandemic fired up inflation and Russia’s invasion of Ukraine exacerbated the situation, leading to a rapid increase in interest rates. Companies had to take on extra debt during the pandemic and the subsequent action by central banks to raise interest rates has put pressure on corporate finances. Those having to refinance over the past few years, or those on floating rates, have really felt the pain as the cost of servicing borrowings has shot up.”
Margin squeeze
“Higher labour and energy costs have eaten into profit margins, particularly for companies lacking the strength to fully pass on extra costs to customers.”
Demand recovery but balance sheet weak
“The travel industry has had a lumpy recovery over the past few years. While demand has certainly bounced back, cost pressures have weighed on earnings and certain companies in the sector such as TUI are still trying to pay down large debts amassed during the pandemic.”
An amalgamation of negative factors
“Inflation combined with other negative factors created a cocktail of problems, just as Direct Line experienced. Having already felt the pressure of high inflation making it more expensive to fix cars damaged in accidents, a higher-than-expected amount of insurance claims weighed on Direct Line and left its balance sheet weaker which prompted management to cancel its dividend. These factors pulled down the stock price, explaining why its shares are trading well below pre-Covid levels.”
Negative impact of issuing new shares
“Companies had to raise new money during the pandemic if they were unsure how long their funds would last. A reduction or complete absence of income meant relying on cash savings and/or debt would weaken their balance sheets and so it became common for companies to issue new shares to raise additional cash. Doing so increased the share count which effectively watered down an existing investor’s ownership.
“SSP was among the companies to have issued new stock during the pandemic and it is still trading below its pre-Covid levels. The average share count for the travel hub food and drink seller went from 458 million in the year ending September 2019 to 697 million two years later.”
Choppy markets really hurt one sector
“Spare a thought for asset managers as inflation and the sharp increase in interest rates have created choppy market conditions since the onset of Covid for equity and bondholders. Investors taking money out of investment funds and parking it in cash also meant significant outflows for asset managers.
“The likes of Jupiter and Ashmore are nowhere near reclaiming all the share price territory lost since the start of the Covid market crash. A pick-up in markets would be helpful to these stocks but otherwise they still face considerable headwinds as sentiment remains poor towards the sector.”