March 18, 2020 / 9:57 PM / 22 days ago

Breakingviews - Corona Capital, March 18: Elizabeth Warren

LONDON/MUMBAI/NEW YORK/HONG KONG (Reuters Breakingviews) - Concise views on the pandemic’s financial fallout from Breakingviews columnists across the globe.

Democratic U.S. presidential candidate Senator Elizabeth Warren waves to supporters at her Super Tuesday night rally in Detroit, Michigan, U.S., March 3, 2020. REUTERS/Rebecca Cook

LATEST

- Elizabeth Warren

- Gunmakers’ viral boost

- Tencent’s odd prognosis

- Italy’s timeline hint

- Restrictions worsen panic shopping

ELIZABETH WARREN HAS A PLAN FOR BAILOUTS. The Massachusetts senator and former Democratic presidential candidate has taken to Twitter to lay out eight conditions for any company taking U.S. taxpayer aid. First among them: use the cash to keep staff employed.

Dividends and executive bonuses would be nixed while a company uses government cash and for three years afterwards. That’s pretty reasonable, though incentivizing companies to repay the money early would be good, too.

More controversial is her demand that recipients never again buy back stock. That’s too draconian. Imposing limits on buybacks would be better than an outright ban.

Warren has dropped out of the race for the White House, so what she wants matters less than it did. Then again, her role in the Senate, where bailouts will be debated, gives her influence. And executives may find that beggars can’t be choosers. (By Antony Currie)

IRONMONGER FEVER. The S&P 500 Index has plunged, but gunmakers are having their best run in years. American Outdoor Brands, Smith & Wesson’s parent, is up around 50% in a week of trading; rival Sturm Ruger is up 13%. Election years are good for firearms sales. Financial crises a boon. Epidemics are better still.

Even before coronavirus, February was the third-busiest month on record for U.S. background checks, according to the FBI. One-fifth of sales came from Illinois, then with just three confirmed cases. Lines forming outside gun retailers, and rapidly multiplying diagnoses, suggest a buying spree.

The panic is well received by gunsmiths. Their shares have lagged for years, and as mass shootings proliferated, big retailers like Walmart added their support for tighter gun regulation. Coronavirus is a tonic today – but the long-term prognosis is as grim as ever. (By John Foley)

TENCENT’S VAGUE VIRUS PROGNOSIS. All eyes were on the web giant’s assessment of Covid-19’s financial impact during Wednesday’s quarterly results. The $410 billion company said it didn’t expect the epidemic “to have any significant impact on its financial position”, without elaborating. Still, executives on a call later warned that some of its businesses, such as cloud computing and mobile payments, may be hit.

Tencent’s hit games like “Honor of Kings”, video streaming and other apps are clear winners as millions of people are stuck at home. But virus-hit businesses across China will probably cut back on things like advertising on Tencent’s flagship WeChat app and sites. The segment accounted for roughly one-fifth of the company’s $54 billion in sales last year. Any benefits, or damage, may take time to reach its bottom line. (By Robyn Mak)

ITALY OFFERS CLUE TO CRISIS TIMELINE. How long will the pandemic emergency last? Rome’s new budget measures may give away the government’s best hope. Its “Heal Italy” package contains emergency measures worth 35 billion euros to support the economy. These include individual handouts worth 600 euros for self-employed or temporary workers in hard-hit sectors like tourism, and vouchers which working parents can use to pay for babysitting while schools are shut.

The most onerous measure, however, is probably a countrywide extension of state-backed temporary layoff schemes, aimed at preventing companies from embarking on major sackings. They can last a maximum of nine weeks, says the decree. That’s probably the limit of how much coronavirus pain Rome can absorb. (By Lisa Jucca)

SHOPPING RESTRICTIONS ADD TO PANIC. UK supermarkets like Tesco and J Sainsbury are cracking down on panic buying. Having originally sought to ease fears by assuring supplies were ample, they’re now placing outright limits on the amount of toilet paper and long-life milk customers can buy. Sainsbury’s boss Mike Coupe is also giving preferable online shopping slots to the elderly and allowing them to enter shops before other customers.

The new strategy may backfire. Restrictions only fuel customers’ suspicions that supplies are low, giving them a motive to skirt the limits. Further panic buying could then create the very reality shoppers fear. Worse, staff illnesses in markets and suppliers could reach 10% of employees when the pandemic peaks, an analyst told Breakingviews, making it harder in the future to stock shelves. Coupe and his peers risk fanning the flames before the real crisis even hits. (By Aimee Donnellan)

STUTTERING WEWORK BAILOUT SIGNALS CASH CRUNCH. Masayoshi Son’s $63 billion tech-to-telecom conglomerate, SoftBank, may wiggle out from a commitment to buy $3 billion of shares in the office sub-lessor, according to news reports. It would be the most sensible part of the bailout package to renege on, since the cash is going to existing investors rather than the company.

SoftBank is citing probes into WeWork’s business by the U.S. Securities and Exchange Commission for any potential change of heart, Reuters reported. Perhaps. But the risk for Son’s investors is that he’s strapped for cash amid the scramble for liquid assets. As Breakingviews wrote last year, SoftBank’s sustainable cash flows barely cover interest payments, and its asset values are inflated. The potential for a fire sale is rising. (By Liam Proud)

FUJIFILM CAPTURES CONGLOMERATE POWER: Shares of the $25 billion Japanese company rose 15% on Wednesday after a Chinese official said an active ingredient of its Avigan anti-flu drug appeared to help coronavirus patients recover. The idea that an outfit best-known for churning out cameras, printers, and accounting scandals might ease the current health burden on the world is a rare nod to conglomerate power. Every so often, perhaps there’s an upside surprise to be found in the corporate sprawl. (By Una Galani)

INSURER MUNICH RE DODGING A BULLET: Munich Re has a surprisingly optimistic view about the threat of the coronavirus on the global economy. Though the 22 billion euro insurer’s shares have nearly halved since the virus hit, its annual report, released this week, suggested greater concern about low euro zone interest rates than the threat of businesses claiming on policies that pay out if they’re forced to close their doors.

There’s a simple explanation (aside from the possibility the report was written before the acute phase of the current crisis). While the Bavarian firm does reinsure such policies, most exclude pandemic risk. Munich Re estimates Covid-19 would only lead to 1.4 billion euros worth of claims. That equates to the cost of a medium-sized natural catastrophe. Investors should take comfort from the fact that even in this scenario it wouldn’t wipe out the 2.7 billion euros of net income the reinsurer made in 2019. The lesson for small businesses: read the small print. (By Aimee Donnellan)

GROCERS AND PHARMACIES ARE EUROPE’S SAFE(R) HAVENS. Retailers selling essentials have outperformed the broader STOXX Europe 600 Index, which is down 30% this year. Supermarkets specialising in delivery are particularly well-placed as people avoid crowded supermarkets. Shares in UK-based Ocado are up 6% in 2020. Ahold Delhaize, Colruyt and Carrefour are weathering the storm.

The trend may give British incumbents Tesco and Sainsbury’s a hand in their battle with discounters Lidl and Aldi. The German duo has been winning market share in recent years but lacks established delivery services. Shoppers discovering the convenience of online ordering may stick with it when the virus abates, denting the Germans’ expansion. (By Dasha Afanasieva)

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Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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