A headwind for British equities may be gathering strength: corporate profit warnings have reached their highest level since the financial crisis, according to figures from the consultancy EY. A total of 312 listed firms warned analysts to lower their forecasts in the 12 months to the end of March, up from 302 in the previous year and the highest 12-month total since 2008.
In the first quarter of 2016, 76 firms issued warnings, compared to 100 in the last three months of 2015. The travails of the commodities and oil sectors are partly responsible, but it hardly helps that “the global economy is still struggling to build momentum”, as the EY report notes. Uncertainty over China’s slowdown is also lingering.
China’s new obsession
One of the hallmarks of China’s equity bubble last year was the surge of money from retail investors. They borrowed money to buy stocks, thus magnifying the ups and downs in the index. Today, “Chinese speculators have a new obsession”, says Bloomberg.com: “the commodities market”. Prices of steel rebar (reinforcing rods in concrete) futures, for instance, have jumped by a third in April alone; cotton futures have risen by over 10% this month. Hot-rolled coil prices have leapt too. “The great ball of China money is moving… to commodities,” says Zhang Guoyu of Tebon Securities.
An apparent pick-up in demand for many raw materials has encouraged investors, while the days of easy money have returned now that the government has stimulated lending. So they are making leveraged bets again, adding to the frenzy. On Thursday 21 April contracts on 223 million metric tonnes of rebar changed hands, more than China’s fullyear production, says Bloomberg.com. This is bound to end in tears, reckons Tiger Shi of Bands Financial. Last week “felt just like the stockmarket… before the crash”.