Share prices show recession's impact can't be hurried

10-June-2009

The bear market in UK recruitment company shares began in mid-July 2007 - almost exactly the same day that the world changed for Northern Rock. Excluding those with strong outplacement activities or involved in the healthcare sector, most recruitment firm shares have fallen dramatically since then.

From July 2007 to the end of March 2009, the largest recruitment firms’ share prices had fallen by between 60% and 80%. For the five weeks after that there was a substantial bounce with shares rising by a minimum of 34% from that low base (Hays) and to well over 50% (Michael Page, Robert Walters and SThree).

There has been some suggestion (Recruiter, 13 May) that the recent better tone to the stock market in general and recruitment company share prices in particular will be sustained. In the words of that old advertising jingle, ‘you can’t hurry a Murray’. In similar vein, you can’t hurry the impact of an extremely bad recession nor the natural consequences for recruitment company shares.

The first leg of the global banking crisis has largely happened, but there is more to come. Most people now anticipate unemployment rising significantly above 3m; credit contraction throughout Europe; a gathering squeeze on private sector spending; and a government deficit crisis leading to rising interest rates and an unprecedented public sector cut backs. The negative impact of much of these developments have yet to be felt.

Things for recruiters may improve from excessively ‘oversold’ customer positioning that we saw in Q1 2009. At best it is a bath-shaped recession, but more likely it will be a downward sloping W-shaped recession. This means better times won’t come until 2011.

Another consideration is to look at the traditional relationship between GDP and growth or contraction in the recruitment sector. With no greater science behind it than observation, the old view was that +2% per annum growth in GDP left aggregate turnover in the UK recruitment sector unchanged. A 1% change in annual GDP (up or down) impacted aggregate recruitment sector turnover by an amplified 7%. In the current year we expect to see GDP contraction of 4% in the UK, implying turnover in the sector to fall by some 42%. That certainly seems to be being borne out by events. Optimists are looking for 1-1.5% GDP growth next year which still implies a further contraction in the sector.

No upturn in 2010 is also consistent with what recruiters’ share prices experienced in the last downturn. In 2000-03 - not technically a recession - the Wyvern UK Human Capital Services index of recruitment prices went down from December 1999 for what proved to be a total of 39 months until it turned the corner in March 2003. In total the index went down some 82%.

What about the share prices of UK publicly quoted recruitment companies this time round? That same index shows us that this downturn started in July 2007 and that thus far it’s gone down 58%. There is no reason at all to think that this share price downturn will be shorter than last time, which suggests that it’ll be October 2010 (39 months from the beginning) before one can even begin to look for a sustained upturn in share prices. And that’s if this recession is no worse than last time.

Needless to say the Wyvern index does not go down in straight lines. In the last downturn there were a number of false dawns including in particular a sustained uplift and plateauing after 22 months - just what is being reproduced now.

At the moment market analysts seem to be projecting a bounce back or flatness for many recruitment firms next year. As this year progresses, the bounce back hopes for 2010 will be misplaced and people will find worries for 2011. It’s just too early for a bounce to be sustained.

James Wellesley Wesley is a partner with Wyvern Partners. Over the last 15 years he has focused on providing M&A and corporate finance advice to companies in the recruitment sector.