Volkswagen adds further gloom

Equities after a quiet Monday took a distinct turn for the worse on Tuesday. On the face of it at the start of the day equity markets had no initial reason to fall. The US market had held in, overnight Asian markets held steady, and the small China data point came in line with expectations. The Vix had fallen again suggesting investors were becoming more confident with the outlook for equities. So what went wrong? The answer may lie in Volkswagen and Hilary Clinton.

 

Tesco’s sharp fall last year was an example of how one event may impact investor sentiment to a broader degree. Up to that point pension funds across the globe were happy that the world always needed to buy food, and for that reason Tesco was a core holding. This was a “blue chip company” in the true definition of the term. Tesco’s image was already tarnished but it was quickly shattered last September after the accountancy errors were revealed. BP is another example of a company whose crown has slipped, as the company still has to deal with the aftermath of Gulf of Mexico disaster, as well as the falling oil price. Glaxo likewise an example of a blue chip company who has had sentiment and earnings impacted by scandal.

 

The latest event was the admission by VW that they have been accused of deceiving regulators on emissions data; so far this news has wiped 25bn euros of the value of VW’s market cap. Why a company of VW’s size would feel the need to do this is a mystery. Some may argue it stems from the pressure managers feel under to deliver on short-term goals. The broader impact is to once again shake investor confidence in blue chip companies. Many pension funds will have owned VW as a core part of their portfolio. If a blue chip company such as VW can be accused of such an action, are their unknown risks to other blue chip names.

 

After the fall in the VW share price traders may be tempted to play a short-term bounce. Investors may tread cautiously until greater clarity becomes available on the longer-term impact, not only from regulators but also from the general car buying public.

 

The other story to make headlines was Hillary Clinton, as she bids to be the first female US President, having a pop at the biotech industry via twitter. The Pharmaceutical industry has been a target for Hillary Clinton going back to the days of her husband’s Presidency. Overnight she again focused on pricing as well as threatening to remove some tax breaks the big pharma companies enjoy.

 

The two headline events on Tuesday combined to hit global equity indexes by up to 2.5%. The VW news will probably keep investors on the sidelines for car stocks for a while until the picture becomes clearer. It is possible that the comments from Hillary Clinton will have a shorter-term effect as investors may on reflection see this as early electioneering. First she has to get in, and then she has to get the support from congress. One can also bet there will be a lot of lobbying from companies that contribute a lot to the US tax revenues.  Investors may conclude any impact could be a way away yet, and ultimately legislation will not be as draconian as the headlines may suggest. As for the market overall, these events just add to the uncertainty which is not helpful. 

Posted on September 23, 2015 .