Pat McCann, who’s seen his share of hard times as a hotel industry veteran of five decades, has learned all too quickly how economic contagion from Covid-19 is spreading more quickly than the virus itself.
The chief executive of Dalata Hotel Group reported on February 25th – as the company reported increases in full-year profits and shareholder dividends – that he had seen an "almost zero" effect from the coronavirus on business.
“We are monitoring it very closely,” he told analysts on a call. “But to date, there’s been no material impact.”
Less than two weeks later, everything had changed. The State’s largest hotel operator was forced on Monday to alert the stock market that it had “observed a significant reduction in bookings and a significant increase in cancellations” as the virus ripped through Europe, particularly northern Italy, currently the most stricken area outside Asia, and from there to the UK and Ireland.
While shares in the company slumped almost 10 per cent on the day, Dalata was far from alone.
Stocks globally plunged the most since the height of the 2008 financial crisis on Monday as investors baulked at the rapid spread of the virus and oil prices, already under pressure amid fears of a global slowdown, spiralled more than 30 per cent lower as Russia and Saudi Arabia launched a price war amid a row over output.
Initially there was some complacency among fund managers that were stuck in the 'buy on the dip' mindset whenever equity markets dropped on coronavirus headlines
Western equity markets had continued to climb on a daily basis to record highs through most of February, despite much of China being in lockdown, as international investors took a view that the virus was an Asian health issue, with the broader economic impact restricted to short-term disruptions to supply chains, manufacturing and local consumer demand in the world’s most populous nation.
However, European and US stocks started to sell off in the final week of the month as Italy saw a spike in cases around the country’s business capital of Milan and authorities sealed off the hardest hit towns.
"I think initially there was some complacency among fund managers that were stuck in the 'buy on the dip' mindset whenever equity markets dropped on coronavirus headlines," said Eugene Kiernan, an independent investment consultant in Dublin.
“But Italy was a gamechanger. The problem for markets is we will see massive cuts to profit and growth forecasts – we’re not talking in terms of decimal points.”
Pandemic classification
Financial markets have continued to be whipped this week as the number of cases climbs at pace and investors fret that the scramble by governments and central banks will fail to staunch Covid-19's spread and a global recession. The World Health Organisation declared on Wednesday that the worldwide outbreak of the virus could now be classified as a pandemic.
Confirmed cases of infection are approaching 125,000, with the death toll at more than 4,600.
The Iseq stocks index in Dublin, pan-European Stoxx 600 and S&P 500, which had been on the longest bull run in history, have all now slumped into bear territory. A bear market is when overwhelming pessimism drives a market down more than 20 per cent in a short period.
We do not know how long this crisis will last, but the impact on this sector alone is likely to be enough to push the euro area into recession
"The evidence is now insurmountable as to the scale of the global shock this is, and will be, for growth and activity, over and above the humanitarian tragedy," Andrew Canobi, a director of fixed income in US investment giant Franklin Templeton's Australian business, said in a note to clients on Thursday. "A global recession is quite possible."
With Ireland’s tourism and hospitality industry already reeling from the cancellation of St Patrick’s Day parades and the impact of social distancing to contain the disease, the Restaurant Association of Ireland warned on Wednesday that up to 30,000 jobs could be lost in the wider sector over the next three months.
US president Donald Trump’s announcement hours later of a ban on travel from Europe will deliver another blow, even if Ireland and the UK have so far been left off list of affected countries. Taoiseach Leo Varadkar revealed on Thursday that schools, colleges and other cultural institutions would close from 6pm until March 29th.
Employment in tourism represents 10 per cent of the Irish workforce, compared to Organisation for Economic Co-operation and Development average of 7 per cent, according to Goodbody Stockbrokers economist Dermot O’Leary.
“We do not know how long this crisis will last, but the impact on this sector alone is likely to be enough to push the euro area into recession,” he said.
The US Federal Reserve became the first major central bank to act when it moved last week to announce its first emergency interest-rate cut since the 2008 crash. Financial markets are betting that the Fed will move again next week to follow up its 0.5 percentage point reduction with a further 0.75 per cent.
Emergency cut
The Bank of England made an emergency cut to its main rate on Wednesday to 0.25 per cent, leaving little further scope for further reductions, and incentivised banks to continue to lend. Hours later, the UK's new chancellor of the exchequer, Rishi Sunak, unveiled a £30 billion (€34 billion) stimulus package to help shield the country's economy.
Equities virtually went into freefall on Thursday as attempts by Trump and the European Central Bank (ECB) to address the crisis disappointed financial markets.
Aside from unveiling a European travel suspension in his prime-time address on Wednesday that was designed to reassure Americans, Trump announced lending aid for small businesses and called on Congress to back plans for "an immediate payroll tax relief".
ECB president Christine Lagarde presided over a unanimous decision on Thursday afternoon to leave the institution's interest rates unchanged. Economist had expected the bank to lower its deposits rate, currently at minus 0.5 per cent, even if it had little or no room for manoeuvre on its main rate, languishing at zero.
Still, the ECB decided to increase the scope of its quantitative-easing bond-buying programme and provide more cheap loans to banks in an effort to keep money flowing even as the euro zone and global economies are going through “a major shock”. The ECB’s banking supervision arm also decided to let banks operate temporarily with less capital in reserve than what regulators normally demand.
"This is an underwhelming package from the ECB," said Marchel Alexandrovich, an economist with investment firm Jefferies.
The Stoxx Europe 600 dropped a record 10.5 per cent. Bond markets also recoiled, with the market interest rate – or yield – on 10-year Italian government bonds jumping from 1.21 per cent to as high as 1.89 per cent. The Italian state is already one of the most indebted on the planet – with €2.4 trillion of borrowings. Lagarde said she expects to see euro zone governments issue more debt in the coming months help fund creaking healthcare systems.
The yield in 10-year Irish bonds, which had been in negative territory since late January, also spiked, rising to as high as 0.14 per cent.
The big fear is the threat that the coronavirus poses for debt markets
“The latest indicators suggest a considerable worsening of the near-term growth outlook,” said Lagarde. “The disruption of supply chains is impeding production plans in the manufacturing sector, while necessary containment measures against the further spread of the coronavirus are adversely affecting economic growth.”
Lagarde passed the buck to euro zone governments to act, saying “an ambitious and co-ordinated fiscal policy response is required to support businesses and workers at risk”.
She said that averting the threat of a euro-zone recession depended “on the speed [and] the strength of the collective approach” by all players – adding that she hoped a meeting of euro zone finance ministers next Monday would produce “a decisive and determined move”.
Debt markets
The big fear is the threat that the coronavirus poses for debt markets. Last October, the International Monetary Fund (IMF) warned that almost 40 per cent, or $19 trillion, of corporate debt in major economies, including the US, China, Germany, Japan, the UK, France, Italy and Spain, was at risk of default in the event of another global economic downturn.
The pace at which Covid-19 has slithered globally has sent economists and analysts scrambling along with health experts to build out epidemic curve – or Epi Curve – charts that plot the frequency of new cases in order to estimate when the pandemic – and related fatalities – peak.
Using World Health Organisation data for Italy, Iran and South Korea, Deutsche Bank analysts, including Pito Chickering in New York, estimate scenarios for the US, the world's largest economy, Germany, the fourth largest, and the UK, ranked number six.
“At this point, we are concerned that the spike we expect to see in the US, UK and Germany will continue to fuel concerns in those markets,” the Deutsche Bank analysts said. “However, at this point our longer-term projections aren’t as dire as many fear.”
Dalata ranks as the biggest loser among large companies on the Iseq, down 55 per cent so far this year
The US, which currently has more than 1,300 confirmed cases, could see this rise to as many as 301,000 by June 1st, when growth should begin slow due to warmer temperatures, according to the Deutsche Bank forecasts. The UK figure could reach 236,000 by that stage, while Germany’s cases of infection could climb to 253,000.
The current death rate for confirmed cases is running at about 3.6 per cent.
“To put that in perspective, in the 2019-2020 flu season there were 245,000 positive flu tests and 4,000 confirmed flu deaths,” the report said. “One of the many caveats with our projections is we are still early on the Epi Curve, so our projections can increase by multiples depending on what happens within Italy, Iran and South Korea.”
Pessimistic take
Some governments have a much more pessimistic take. German chancellor Angela Merkel warned on Wednesday that 70 per cent of Germans could eventually contract the virus. Varadkar has said that up to 50 per cent to 60 per cent of the population in Ireland could become infected.
Back on the stock market, Dalata ranks as the biggest loser among large companies on the Iseq, down 55 per cent so far this year.
Still, analysts at the company’s broker, Davy, moved this week to highlight how Dalata is better positioned than most hotel groups in the Republic.
"In the last downcycle, Dublin [revenue per available room] declined by 35 per cent peak to trough. Dalata not only traded successfully through this period, but landlords [of other hotels] turned to the group to operate their assets – further strengthening its position," said Davy analyst Colin Grant. "Management has proven its ability to survive and thrive in extreme market conditions."
Not all businesses will be so lucky.
