The Covid-19 asset value bubble…our view on values

The general consensus from commentators at the outset of Covid-19 was that capital asset markets would be materially affected. This was envisaged as a result of the predicted decline in global trade, much like that which has been seen with previous recessions. But what happened? Not that!

Like many governments around the globe, a number of rescue packages were rapidly established to underpin industries. The UK was no different and has pumped billions into a variety of sectors across the economy to prevent businesses failing. Then as the impact and actuality of the pandemic have been recognised the worst affected sectors have received further support to maintain companies, keep people employed and shore up the economy. Either read on or find a quick overview in our video:

So how did this impact on asset values?

The realities are that sectors including agriculture, food, pharmaceutical, healthcare, freight and to a large extent manufacturing and construction either outperformed or remained positive. The practical implications of which were that asset values in these sectors were largely left intact. In fact contrary to belief at the outset, lockdown created a premium for many of these asset categories. This was largely due to production lines and supply chains being halted, but importantly demand remained static. While supply ceased, this left it to the used equipment markets to fulfil the void in demand.

As this is the case who did lose out? Well largely, those sectors that served the hospitality and leisure sectors. In particular, the massive reduction in passenger travel and the cancellation of events affected the values of bus and coach assets and audio-visual equipment markets. This is continuing to be evident by the constant reminders in the news of business failures in these sectors.

How might this change?

For those sectors where supply chain delays are recovering or maintaining their equilibrium as we move longer term into the pandemic, the used equipment markets are likely to soften. Those with the most liquidity probably being the first to show signs of recovery, for example we can expect HGV and LCV assets to lead the way followed by manufacturing etc.

Sitting slightly behind this sits film and broadcast equipment. This is a sector that before Covid-19 was experiencing significant growth, but was seriously impacted. However this is now recovering as productions, some sports events (even without live audiences) and advertisers are returning to the studios. It will be interesting to see if this continues with the latest round of localised restrictions.

Sadly, those sectors already in decline could unfortunately be the losers as we shift longer term to a contact free society. Particularly as from an entertainment and socialising aspect this sees venues such as cinemas, theatres and restaurants from operating at less than full capacity and prevents event spaces from opening at all. Therefore, we need to expect assets from these sectors to suffer further distress and a material asset devaluation.

Now we are seeing that the government needs to balance the demands of health professionals in addressing this second phase versus seeking to balance the deficit requiring CBIL loan repayment and the end of tax breaks. This coupled with the ability of lenders and property owners to take action means a winter of financial distress may become more evident.

How does valuation support the new paradigm?

Debt continues to be made abundantly available for many viable businesses and our loan collateral valuations across many sectors will continue to support our corporate and banking clients with working capital and in M&A transactions. However it is important to note that conversely, there will be failures too which will see many lenders clients requiring us to support them in minimising loss.

Tim Chapman, from Hickman Shearer comments;
“It’s not easy to predict what will happen to capital asset values as markets are changing very quickly. In many sectors, like freight and some manufacturing, these values are inflated but the bubble will most probably burst in Q1 as we are already seeing the pandemic returning. Combined with the government potentially changing their approach to injecting further support, those already affected will unfortunately worsen as we move towards limited support and the government preferring to foster a nation being retrained”.

All change?

For sure, none of us have ever witnessed such a polarised economy and asset value trends have never been more volatile. As macro and micro economic factors change so do capital asset equipment values and we are continually re-assessing market trends. If your business is affected by the changes in asset values please follow us and we will keep you updated as we continue to navigate Covid-19 and all the implications it is creating.


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