HAMISH MCRAE: What Jaguar’s loss teaches us all – don’t have too many eggs in one basket
The huge loss suffered by Jaguar Land Rover – £3.4billion in one three-month period – is a major blow for the car maker, of course. Shares in its owner, Tata Motors, last week fell by one fifth, their sharpest decline for 26 years.
But it also carries lessons for all companies, all countries, and indeed all of us in our daily lives. The rule is ‘don’t have too many eggs in one basket’.
The reasons for the Jaguar Land Rover loss were a fall-off in sales to China, the switch from diesel in Europe, and costs associated with Brexit. Sales in the UK and the US were actually very good, but Jaguar Land Rover had made too big a bet on diesel and too big a bet on China.
Losses: Jaguar Land Rover has been hit by a fall-off in sales to China, the switch from diesel in Europe, and costs associated with Brexit
Growth in China has slowed dramatically and the political climate towards buying imported products has cooled too. German car makers have been savaged by this shift, like Jaguar Land Rover.
Because Germany’s car industry is so big relative to its overall economy at about 6 per cent of Gross Domestic Product, it is possible – we don’t have final figures yet – that Germany has fallen into recession.
It is also possible that the UK will turn out to have been the fastest-growing large European economy in the second half of 2018. We’ll get GDP figures this week that may confirm that.
So if you are a company, you don’t want to be over-reliant on one or two markets. If you are a country, you don’t want to be over-reliant on one or two industries, particularly those that depend on exports. Germany is indeed a wonderfully successful exporter. It has a current account surplus equivalent to 8 per cent of GDP.
But not only has that surplus generated all sorts of political problems, including pushback from a more nationalist US, it means if exports fall, the whole economy takes a tumble.
Of course, countries have to have both manufacturing and services. It is not either/or. But predominantly service industry-based economies, such as the UK and US, seem more resilient to swings in international trade than ones that are overly dependent on manufacturing. We can roll with the punches. Germany can’t.
Now to us as individuals. Employment in the UK is very strong, with joblessness at its lowest since the 1970s. But we cannot assume this will continue, and it is pretty clear that the world economy is heading into some sort of downturn. We also cannot know what sort of political conditions will prevail in another ten or 20 years’ time.
So the lesson of Jaguar Land Rover for us is to spread our risk. It sounds boring, but it means building up some savings, being aware that our jobs may not be as secure as we’d like, maybe having sidelines that make some money. By all means get a new Jaguar if you are in that market – it needs our help – but figure out how to tuck away some cash too.
Gone bust: Many energy suppliers have gone into administration recently
This string of fledgling energy companies that are going belly up should be a warning. If you get a wonderful-sounding offer for cheap, green electricity, or fancy buying a bond yielding 11 per cent from one of them, do the following…
Google the firm and go on to the Companies House website (beta.companieshouse.gov.uk), to look at its reports. If any director has been associated with firms that have gone into administration that is a red flag. If any of the accounts have been delayed, that is another. Look at the accounts: are they losing money? Another red flag. Who are the directors anyway? Is there evidence they know anything about energy?
It is all public information. It is all free. If you smell a rat, you might be wise to pass this one by.
I noted a couple of weeks ago that with an average dividend yield of 4.7 per cent, big British companies were very cheap by historical standards. I have just seen a note by Saracen Fund Managers that the gap between the average dividend yield on FTSE 100 companies and that on ten-year gilts is at its highest since the Second Word War.
Low share prices (and hence a high dividend yield) and high gilt prices (and hence a low interest yield) are signs of extreme pessimism about the future. I know things look a bit tricky now, but I don’t think the outlook is quite as bad as it was in 1940.