18 ★ FINANCIAL TIMES Tuesday 7 April 2020
Less than a year ago, the US Fed wrote
that big banks may “use capital
distributions to signal financial
strength, even when facing a
deteriorating or highly stressful
environment”.
Little did the central bank anticipate
such a quick test of that hypothesis.
Since the 2008 crisis, the biggest
financial institutions have been forced
to add hundreds of billions of dollars in
equity to their balance sheets to boost
loss-absorption capabilities. By 2019,
the institutions felt their investors
had swallowed all of their bitter
medicine. The consequence was that
the likes of JPMorgan, Citigroup, Bank
of America and others got the green
light to distribute more than 100 per of
net income to shareholders using
dividends and buybacks.
Accepting the new economic reality
this year, banks in March announced
plans to halt share repurchases.
However, they have hesitated to
abolish dividends. Halting these
quarterly payouts would be wise.
Large US banks prefer to return
capital to shareholders using buybacks.
In 2019, the proportion of buybacks to
total shareholder returns for JPMorgan,
Citigroup and Bank of America was
between two-thirds and four-fifths.
The three ended the year with $650bn
of common equity while the sum total
of their dividends was just $24bn.
Retaining those $24bn of dividends
instead as equity, for banks still levered
10:1, looks sensible.
JPMorgan’s Jamie Dimon, who loves
to boast of his bank’s “fortress balance
sheet” even said yesterday that the
bank would consider halting its
dividend if the economy was heading
for a worst-case scenario.
The good news for shareholders is
that leverage can work both ways.
When the economy begins to
recover, banks should benefit first.
Regulators may still be risk averse
about immediately allowing bigBank dividends:
fortress under siegedividends and buybacks. But bank
investors will be repaid in appreciating
market values nonetheless.Careful what you wish for. Hong Kong
Exchanges & Clearing has wanted to
expand its derivatives business for
some time. The coronavirus outbreak
has boosted securities trading overall —
but it comes at a cost.
Futures trading volumes have gone
through the roof. Volumes rose 46 per
cent in March as traders tried to hedge
extreme volatility in the equity
markets. In early February, weekly
Hang Seng index options tradingHong Kong Exchanges:
rebirth of the tradervolumes reached an all-time record.
Iron ore futures and some currency
futures also hit historical highs later in
the month. Trading fees, where it gets
half of its revenues, should stage a
sharp rebound in the current quarter.
But HKEX will be able to escape a
slowing IPO market at home. Funds
raised from listings are off more than a
third this year. Both bankers and
Chinese companies — the exchange’s
biggest fundraising clients — have only
just restarted business after lockdowns.
But even cancelled IPOs pay
forfeitures fees. Also, listings bring in
less than half the revenues it gets from
trading fees. Overall trading volumes
for the first two months of this year
increased 14 per cent. Exchange traded
fund volumes jumped 70 per cent.
All this is reflected in a share price,which though down 9 per cent this
year, has beaten the broader market’s
17 per cent decline.
HKEX trades at 27 times forward
earnings, a premium of about a 10th to
peers such as the Singapore Exchange.
The latter had lower average trading
volumes last month, and lacks HKEX’s
huge trading flows from retail Chinese
investors. Costs should start coming
down soon, given that the LME has
moved all business to its electronic
system since March 30.
That should begin to bolster its
bottom line.
HKEX has got its wish for more
trading, but perhaps not in the way it
might have hoped.
Investors keen to hedge falling
corporate earnings in their portfolios
should do so using HKEX.Shoppers in Britain decided some time
ago to steer clear of the nation’s
department stores. The coronavirus
lockdown simply makes that stance
obligatory. Declining footfall and rising
rents have pushed many shops towards
the brink. A total shutdown ensures
their demise. Debenhams is trying not
to be one of the first casualties.
Having just completed one
administration that started this time
last year, the department store said
yesterday that it would begin another.
Under the previous administration,
debt owners including US hedge fund
Silver Point took control. Existing
Debenhams equity holders were wiped
out and a subsequent insolvency
arrangement with landlords slashed
rents by half. The impediment was
billionaire Mike Ashley, owner of 30
per cent of Debenhams shares.
Mr Ashley opposed the
administration and suggested his own
(rejected) restructuring plan. He also
supported landlords in rejecting the
rent reductions. Debenhams claims
that Mr Ashley wanted to ward off any
competition to his own struggling
department store House of Fraser. The
return to administration by
Debenhams will stop further hostile
action for now.
Like many businesses, Debenhams’
ultimate survival depends on how long
the coronavirus lockdown continues.
With all 142 of its physical stores
temporarily closed, sales will
disappear. But the government’s
furlough wage scheme will help it to
reduce overheads.
A new plan has been agreed with
debt holders, who had already
provided liquidity to get the group
through Christmas trading last year.
They hope to convert some £100m of
debt liabilities into equity and then
eventually into an investment profit.
It is a bold gambit. There are still a
few levers to pull. More permanent
store closures is one — reductions to
keep the most profitable Debenhams
stores is a gamble that could well work.
The Debenhams saga is not over yet.Debenhams:
store of some valueDiagnostics are often seen as the
Cinderella of the health sector. This
year, however, the Covid-19 outbreak
has put the spotlight on the sector as
never before. More than 200
companies around the world are racing
to come up with more, and better, tests.
Their success is vital to limit the
pandemic’s economic and human cost.
Gains could be big, but they are
unlikely to be sustained.
Prices of tests are relatively modest.
In the US, for instance, Medicare will
reimburse labs $51 per test but
manufacturers may only get a fifth of
that. Even so, small companies could
see a big spike in revenues. Take
London-listed Novacyt, which had
sales of £12.8m in its last financial year.
The Anglo-French company’s Covid-
orders were already worth nearly £18m
by March 27. Yesterday, shares jumped
12 per cent on news that France had
approved its test. Shares have risen
more than 1,300 per cent this year.
Big, if less spectacular, share price
gains have been recorded in South
Korea — a leader in commercialising
Covid-19 tests.
Shares in molecular diagnostics
company Seegene and rival EDGC have
more than tripled this year.
More diversified companies will get a
smaller boost. Switzerland’s Roche is
supplying millions of tests per month
but analysts at Barclays increased its
2020 estimate for the molecular
diagnostics business by just 5 per cent
to SFr2.2bn. That is under 4 per cent of
total revenues.
In the US, medtech company BD
Group’s share price rose only about
3 per cent despite its being the first big
company to launch an antibody test in
the country, providing evidence of an
immune response to the disease.
Such tests have a vital role to play. By
offering governments an insight into
virus resistance they could end
lockdowns — although accuracy needs
to be improved for this. There are other
problems too. Shortages of the
chemicals used in testing kits are a
growing concern.
Demand will outstrip supply for the
foreseeable future. But the urgent
requirement for tests will not be
sustained once the pandemic is past.
That creates risks for companies
Coronavirus/diagnostics:
the test of biotech
ramping up to respond to the crisis.
Companies that contribute to alleviate
the pandemic will win plaudits and
profits.
Longer term, it cannot guarantee a
prosperous future.CROSSWORD
No. 16,445 Set by GAFF
JOTTER PAD
An anniversary puzzleACROSS
1 Maybe foils Nazis, keeping
promise (6)
4 Respected wolf hurt badly (8)
10 Nice for one to carry laptop
after fifty one, legally (7)
11 Down a bit of fresh coffee
before noon (7)
12 Rate sound as a bell (4)
13 Very soft pine for one backing
possibly grand houses (10)
16 Part of area perfect for
harvester (6)
17 One could be tied to one sort of
cheese (7)
20 Mid-sixties trainee in abbey (7)
21 Herald turnaround in silver
market (6)
24 Accessory to gripping play
about court (6,4)
25 Unrepentant singer (4)
27 Hermit crab useless without
bass, sadly (7)
29 Heath hedges? Warning: prickly!
(7)
30 Complaint resulting from
airborne reproduction (3,5)
31 Container ship (6)
DOWN
1 Single bean plant covers wild
trail (8)
2 Colonialist excited by swinging
(11)
3 Tax burden (4)5 Switch options intermittently
(3,3,2)
6 Change into trainers without
hesitation (10)
7 Meet one wrapped in paper (3)
8 Capital letters only needed
definitely on names/initials (6)
9, 23 Writers of old rest policy
replaced (5,5)
14 Constituents making detailed
admission about passbooks (11)
15 Spinner provided turn at long
last in the middle (10)
18 Lakeside village agrees with Mr
Silly (8)
19 Bulb’s raised cover gone these
days (8)
22 Celebrity cheerleaders’ energy
store (6)
23 See 9
26 Bird swooped (4)
28 Keen to be involved in
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For notes on today’s breaking
stories go towww.ft.com/lexTwitter:@FTLex
A small positive amid the horror of
coronavirus is that it stops Britons
from bickering over Brexit. That does
not help Invesco fund manager Mark
Barnett, though. His faith in a “Brexit
bounce” for UK-focused stocks is the
reason that an investment trust once
worth £1bn is sacking him. His exit
raises questions over value
investment, fund governance and his
own future.
Mr Barnett got the job running top
Invesco UK funds after the departure
of Neil Woodford to form his group.
That closed last year amid fund
collapses. Unfortunately, Mr Barnett
invested in a similar ragbag of stocks
to his mentor: defensive blue-chips,
domestic plays and a few biotechs.
“Value investor” is not a greatcategory to be in when many large
corporations are suspending their
dividends. It is hard to appraise a yield
stock with no yield. Growth equities,
notably US tech stocks, have done
better.
There was a shortlived rally in UK
domestically focused shares after Boris
Johnson agreed a border plan with
Ireland last October. Big companies
with exposure to dollars, but not oil,
have been a better bet. The FTSE 250
index is down 36 per cent since mid-
February. That compares with falls of
one quarter in the large-cap FTSE 100
and S&P 500 indices.
The board of the Perpetual Income &
Growth Investment Trust will replace
Invesco.
The fund holds stocks such as BP,property group Derwent London and
Next, a clothes retailer, according to
S&P Global. Shares have dropped 37
per cent since mid-February.
Active managers, under pressure
from passive rivals during the long
bull run, promised to shine during a
market rout. They are going to have
to do better than this.
Mr Barnett still manages about
£5.3bn, much of it via two funds —
Income and High Income — whose
past success made Mr Woodford
famous. These are open-ended funds,
and lack independent boards.
Disgruntled investors have to vote
with their feet.
If increasing numbers do so, US-
based Invesco will need to reconsider
its own commitment to Mr Barnett.FT graphic Sources: Refinitiv; S&P Global‘Brexit bounce’ was not enough
Perpetual Income & Growth share price
FTSE indexPrice/net
asset value
(rebased)Not so defensive
Top holdings of PI&G IT drop since Feb *BAT
BP
Roche
Tesco
Derwent London
Novartis
BAE Systems
Legal & General
Next
HomeServe
- - - - - * Ranked largest to smallest holding Apr Jan AprThe unavoidable words
FTSE UK filings mentioning ‘coronavirus’
and ‘Covid- ’ since Feb WeeksValue stocks/Invesco: so much for Brexit bounce
UK-focused shares enjoyed a short-lived rally last autumn but they have been hit heavily by coronavirus.
That has hurt funds run by Invesco’s Mark Barnett, a ‘Brexit bounce’ proponent. A flagship investment trust
is dispensing with his services as value stocks falter.APRIL 7 2020 Section:FrontBack Time: 6/4/2020 - 18: 56 User: joe.russ Page Name: 1BACK, Part,Page,Edition: EUR, 18 , 1